Liam Bailey, Knight Frank’s Head of Residential Research, said: "Prime central London residential prices are nearly 50% above their post-Lehman low, reached in March 2009, and are now more than 12% higher than their March 2008 peak.
"Last October we forecast that 2012 would see an additional 5% growth in prices. Just five months into the year, we have already seen 4.7%. Unsurprisingly the key question from clients is whether we are overdue an upgrade to our forecast?
"Among all the issues impacting the market, two are of critical importance: the new stamp duty rate of 7% for £2million-plus properties, and the associated uncertainty surrounding company purchases and the euro zone crisis.
"The early evidence is that the market has absorbed the 7% stamp duty rate fairly well. Price growth in the two months since the Budget change has been slower in the £2million plus sector than the sub-£2million bracket, 1.6% as opposed to 2.7%, but it has remained positive.
"Sales volumes and new applicants in the £2million plus sector were broadly flat in April and May, down 1% and 2% respectively on the same period in 2011.
"Looking at the second issue, while our forecast was based on an assumption that the euro zone would remain unified, we did assume that growing tensions would continue to drive flight capital into the London market, especially from the euro zone periphery, and this is precisely what has happened.
"While it looks very much that the surge in Greek buyers has fallen off sharply since the beginning of the year – those who had the funds to buy have done so – we are now seeing a noticeable uptick in interest from France, Italy, Spain and even German-based purchasers looking at the prime London market.
"If the crisis in the euro zone leads to a break-up, will this flow of funds continue to London? The final form of a break-up will dictate that. Any country which seems at imminent risk of ejection is likely to see a massive outflow of capital, some of which will end up in bricks and mortar in London. But if we are left with a small core around Germany, the value of that smaller bloc’s currency is likely to surge against Sterling, reducing demand from those countries.
"The knock-on economic impact on the UK, and the global economy, means London would be caught between weaker economic conditions and a desire from investors for safe assets. Though there is scope for further growth, for the moment we are leaving our 5% growth forecast of the whole of 2012 untouched."
Rupert des Forges, Partner, Knight Frank Knightsbridge said: "Recent weeks have seen an even greater influx of European buyers looking to purchase property in the Prime London market – a ‘safe haven’ market.
"Europeans are focusing on securing Prime London property residential assets as a method of defensive wealth preservation. We have several recently sold examples including two substantial flats in a premier Knightsbridge block with asking prices in excess of £15,000,000.
"The purchaser’s objective was to secure them and use them as long term rental. Other examples include sales where existing European owners have upgraded from pied à terres to family homes. We have also seen a sharp rise in interest from French investors looking to move quickly before Hollande’s newly proposed wealth tax."
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