Prime central London prices are continuing to grow at a steady pace, but its recovery has been delayed by fewer than expected international buyers and the war on Ukraine, according to the latest prime London sales index for Q2 2022 from Savills.

Growth totalled 0.7% on the quarter – and is up 3.3% on the year. This is the highest annual increase seen since September 2014.

Frances McDonald, research analyst at Savills, said: “As London continues its return to normality, central London values have continued to recover over the past three months, after being in the doldrums for much of the pandemic. However, prices in prime central London are still down -17.6% on their 2014 peak, meaning there is still plenty of opportunity for buyers – especially those buying in foreign currencies, given the recent improvement in currency advantage.

“But unless high net worth foreign investors return in their pre-pandemic numbers, we can expect the market to continue to recover at a slow and steady pace, rather than with a sharp uptick.”

Table 1: Savills prime London index, Q2 2022

Source: Savills prime London index, Q2 2022

A lack of stock remains the biggest issue facing the market, cited by almost half – 45% – of Savills agents in prime central London and 42% in outer London, though this is down from 64% and 68% in Q1.

McDonald added: “Sales at the top end of the market have been driven by domestic buyers since the start of the pandemic and remain the driving force of the market. International arrivals to the UK are still -18% lower than the same period in 2019, as a result growth is delayed by a slower than projected return to normal travel.

“The top end of the market is less reliant on borrowing, reducing its exposure to further rate rises. However it is not completely immune. The low cost of borrowing over recent years has allowed prime buyers to take out larger mortgages, particularly in the South West and West London family house markets. However, with rates still historically low, we don’t expect to see any impact in the short term, particularly given the high levels of equity across most prime locations and buyers’ propensity to lock into fixed term deals.”

Houses continued to outperform flats on an annual basis – but growth is slowing and the gap between the two is narrowing. Houses in outer prime London grew 1.2% on the quarter, down from 2% in Q1, and by 0.8% in prime central London – down from growth of 1.2%.

Flats in both London markets grew 0.5% over the quarter but performed strongest in West London (+1%), where houses have increased in value the most during the pandemic.

“The return of workers back to the capital has been a driving force in the rebalancing between houses and flats. Even with hybrid-working becoming more conventional, workers still want to be close to the office, and the number using the tube to travel into the City hit a new post pandemic high in June at 60% of the pre-pandemic norm”, continued McDonald.

As a result of changing demand, the distribution of growth has shifted away from locations which performed best over the pandemic, to areas of London which combine strong first-time buyer, family and investor markets – as well as outside space. Notting Hill (+2.2%), Clapham (+2.1%), St Johns Wood (+2.1%) and Pimlico (+2.0%) have overtaken the likes of Wimbledon (1.4%), Chiswick (+1.0%) and Wandsworth (+1.0%).