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Prime London market grows for 3rd consecutive quarter

"Prospects for the London market in 2010 look much better than for the rest of the country," according to Yolande Barnes, head of residential research at Savills.

"But we still foresee a weakening of house price growth, even in prime markets, to result in a flattening of growth with a marginal -1% fall by the year end," she said. "This has been made more likely by the signals given in the chancellor’s pre-budget report that remuneration for City high flyers will be curbed. This is likely to reduce both the amount of bonus money available and going into the prime central London property market."

For those with lump sums to invest in the prime central London property market, average gross rental income yields of 4.6% on flats and 3.9% on houses, could look a lot better than interest paid on deposit accounts at present, especially as rents are now growing again at an annualised rate of about 5%.

While Savills believes that medium and long-term capital growth prospects are good, stock selection is key as there are likely to be wide discrepancies between the performance of different locations and different types of property.

Looking back over the past decade, this was certainly the case. The average growth in value of a prime central London property between December 1999 and December 2009 was 83.4% according to the Savills prime central London index. "But behind this figure are some big variations – both in the volatility of growth since the credit crunch and between different places," Barnes said.

These variations mean that someone investing in central South West (Chelsea, Knightsbridge, South Kensington) flats in 1999 would have seen growth in the value of their portfolio of just 40% while, if they had put their money into flats in the central West markets (Kensington, Holland Park, Notting Hill) they would have seen 96% growth.

By putting their money in houses rather than flats, they would have seen capital appreciation of 128% and 115% respectively – in the same locations.

Generally, the higher the growth seen in a sub-market during the boom years, the harder the falls in 2008 were. The subsequent bounce-back has been much more pronounced in the market for houses than the market for flats – with the exception of flats in the prime South-West suburbs of Clapham, Wandsworth, Putney, Wimbledon and Richmond, which, being cheaper, more accessible and readily lettable to the mid-market, appear to be favoured by investors at present.

"The differing fortunes of places and property types have to do with both property and neighbourhood types and the people who buy into them," Barnes said.

"Places that became more fashionable over the decade, like Notting Hill, for example, fared very well but other locations and property types escaped the limelight."

Some of the highest growth seen in the decade has been in markets favoured by those working in the financial services sector. The markets in Kensington, Holland Park and Notting Hill, serviced by the Central line with its links directly into the heart of the City, were particularly popular with those with wealth made in the financial markets. Houses in these locations saw the second highest growth of the decade.

At the same time, those with families increasingly favoured the South West suburbs also known as "Nappy Valley", where the value growth of houses has been the third greatest of all the sub-markets studied.

The highest growth though has been in the billionaire’s market of Prime Central South West houses (in places like Mayfair, Belgravia, Knightsbridge and Chelsea).

"This is a product of London’s ascendancy in the global property markets as it became the residency of choice for the super-rich," Barnes said.

"It is doubtful though whether this type of growth can be repeated when it has been due to a one-off phenomenon like this – for this reason, we are tipping other areas for future growth."

One location that was less fashionable in the last decade was the Savills "northern sector" of St John’s Wood, Regents Park, Primrose Hill, Hampstead and Highgate.

"Growth here over the last decade was relatively low because less of the big City bonus money found its way there but this has been a great strength in the downturn. Its more diverse purchaser base insulated it from the credit crunch and so price falls were more subdued there," Barnes said.

Average house values in this sector, for example, are only 7% below their 2007 peak while flats in the Kensington, Holland Park, Notting Hill sector are still 19% below their peak levels.

"We anticipate that the sheer rarity of houses in a global capital city will ensure that this type continues to appreciate ahead of flats and we would tip the Prime central North sector as one ready to show excess growth in the next decade," she said.

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