The annual pace of UK house price growth rose from 3.8% to 3.9% in October amid strong demand and tighter availability of stock.

RESIDENTIAL RESEARCH

UK RESIDENTIAL MARKET UPDATE

“ The UK outlook is for moderate price growth, with potential outperformance in some urban locations.”Follow Gráinne at @ggilmorekf

For the latest news, views and analysis on the world of prime property, visit Global Briefing or @kfglobalbrief

GRÁINNE GILMORE Head of UK Residential Research

LOOKING AHEAD UK house prices ticked up slightly in October, while the pace of price growth in prime central London continued to slow. Prices are forecast to rise modestly next year, with a continuation of the regional variations that have become more entrenched in recent months.

Key facts November 2015UK house prices rose by 0.6% in October, taking the annual growth to 3.9%

Prime central London prices are up 1% on the year, after falling 0.3% during October

Average rents in prime central London dipped by 0.5% in October, taking annual growth to 1.5%

Average UK prices are forecast to rise by 4.1% in 2016, while prime central London prices forecast to grow by 2%

Price growth in prime central London by area, year to October 2015

Residential market forecast Nov 2015

Regional variations Annual house price growth by region, Sept 2015

Prime markets

Source: Knight Frank ResearchSource: Knight Frank Research / Land Registry

Shrinking stock RICS: Average stock of housing on surveyors’ books (per branch)

Source: Knight Frank Research / RICS

Source: Knight Frank ResearchThe number of homes available for sale dropped to a new record low in October, as shown in the chart above. This lack of stock is impacting activity levels, but is also one of the factors serving to underpin prices, alongside the improving economy, rising wages and high levels of consumer confidence.

The rates of price growth across the country still remain highly regionalised, and localised, as the maps below show.

Knight Frank forecasts price growth of around 4% next year across the UK, with little unwinding of the regional differential currently being seen, although the cumulative growth seen in the East of England and the South East may marginally outpace that in London over the next five years.

Read the forecasts, and the latest Risk Monitor in full on Global Briefing, our residential research blog.

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Housing market and economic overview

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RESIDENTIAL RESEARCHGráinne GilmoreHead of UK Residential Research+44 20 7861 5102grainne.gilmore@knightfrank.com

PRESS OFFICE Jamie Obertelli +44 20 7861 1104 jamie.obertelli@knightfrank.com

UK RESIDENTIAL MARKET UPDATE NOVEMBER 2015

It has been a year of two halves for the prime central London lettings market.

Annual rental value growth peaked at 4.2% in May, the month of the general election, as demand transferred from the sales market.

The cause was uncertainty around property taxation and increased rates of stamp duty mean it remains a live issue, particularly in the super-prime £5,000-plus per week price bracket. However, anxiety around the global economy has dampened demand since the summer.

The uncertainty has centred on events in China, which has caused companies to curb relocation budgets and recruitment plans. The falling oil price has also impacted sentiment among energy companies.

Advertising giant WPP, whose performance is a useful barometer of how much companies are either cutting costs or spending, said in October firms were feeling risk-averse due to geo-political concerns. Rival Publicis said there had been an “unusually large” number of clients postponing or cancelling campaigns.

Adding to the sense of a weaker global economy, speculation has grown that the European Central Bank is likely to extend or increase its quantitative

easing programme in December in order to stimulate inflation.

Against this backdrop, demand for prime rental property has slowed.

Rental values in prime central London fell by -0.5% in October, the steepest monthly decline in two years. The largest monthly drops were -2% in South Kensington and -1.2% in Chelsea, two areas where demand has been traditionally strong among financial services tenants.

Annual rental value growth slowed to 1.5% in October, the lowest level since August 2014, and average prime gross rental yields were flat at 2.95%.

While the number of new prospective tenants rose 2% in September compared to the same month last year, the number of tenancies agreed was -12% lower.

However, despite the near-term uncertainties, the UK economy is performing strongly and the longer-term outlook is positive. As we discuss in the Macroview section on page 2, the author of the closely-watched Z/Yen Global Financial Centres Index report said London will remain one of the most attractive places on earth to do business.

October 2015Annual rental value growth slowed to 1.5% after peaking at 4.2% in May this year

Rental values fell -0.5% in October, the steepest decline in two years

The number of tenancies agreed in September was -12% lower than the same month in 2014

Average prime gross rental yields were flat at 2.95%

Macro View: London’s status as a global financial centre

TOM BILL Head of London Residential Research

“Advertising giant WPP, whose performance is a barometer of how much companies are either cutting costs or spending, said in October firms were feeling risk-averse due to geo-political concerns” Follow Tom at @TomBill_KF

For the latest news, views and analysis on the world of prime property, visit Global Briefing or @kfglobalbrief

PRIME CENTRAL LONDON LETTINGS DEMAND DIPS AS GLOBAL ECONOMY REMAINS VOLATILEAs global companies curb costs, demand for rental property has fallen in recent months, says Tom Bill

RESIDENTIAL RESEARCH

PRIME CENTRALLONDON RENTAL INDEX

FIGURE 1 Rental value growth in prime central London

Source: Knight Frank Residential Research Source: Knight Frank Residential Research

FIGURE 2 Lettings activity slows in prime central London

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RISE OF URBAN PRIME PROPERTY TAX UPDATEMARKET UPDATE

PRIMECOUNTRYREVIEW UK PRIME COUNTRY HOUSE MARKET WINTER 2015

RESIDENTIAL RESEARCH

Prime Central London Rental Index - Oct 2015

UK Prime Country Review - Winter 2015

UK Housing Market Forecast - Nov 2015

RESIDENTIAL RESEARCH

UK RESIDENTIAL MARKET FORECAST

“ Regional differences in pricing and price growth are unlikely to unwind significantly in 2016, although the improving economic and employment picture, especially in the regions, will underpin pricing.”

UK RESIDENTIAL MARKET FORECASTLast year we correctly anticipated a slowdown in UK house price growth in 2015. While the market may end the year slightly ahead of our predictions, a continued moderation in price growth underpins our latest forecast.

Headlines November 2015Cumulative growth in UK prices will total 20.3% in the five years to the end of 2020

In the prime London and prime country markets higher transaction costs will continue to weigh on activity and price growth in 2016 as the market absorbs stamp duty

Prime central London prices are forecast to rise by 2% in 2016 and by 20.5% cumulatively by 2020

The risk that UK interest rates rise more rapidly than expected or that the global economy suffers a notable slowdown in activity remain the biggest risks to the UK housing market

As always national average performance disguises large regional variations that still characterise the UK market.

Values are growing more strongly in the South of England (particularly London and the South East) compared to slower growth in the North of England, Scotland and Wales.

These regional differences are unlikely to unwind significantly in 2016, although the improving economic and employment picture, especially in the regions, will underpin pricing. This is reflected in our House Price Sentiment Index which we produce with Markit Economics. Households in every region of the country expect the value of their home to increase over the next 12-months.

Interest rates continue to play a key role in the market. While capital values will continue to be supported by ultra-low interest rates, the discussion has now turned to when, not if, the Bank of England will start to raise rates; markets are pricing in a rise in the second half of 2016. However, as we highlight in our Risk Monitor on page 2, the Bank is most likely to act cautiously when increasing the base rate.

The current ultra-low base rate, alongside an increased appetite for lending among banks, has led to record-low mortgage rates, and mortgage lending has risen during 2015. The flip-side of this trend however, is that the best mortgage rates are generally only available to those who have access to sizeable deposits or equity.

While there are now more mortgage deals available to those with only a 5% deposit – a trend which will continue into 2016, the MMR mortgage rules mean that clinching a mortgage deal will continue to be challenging for some, especially for first- time buyers.

Activity in the market has stabilised at around 100,000 transactions a month, although it is interesting to note that the cut in stamp duty for homes worth less than £1.1 million in December last year and the

definitive General Election result failed to produce an increase in activity.

This was closely linked to a lack of stock on the market, particularly second-hand stock. A lack of available homes to buy will likely continue to put a floor under pricing in 2016. There is now even more emphasis on the delivery of new homes, and while levels of housebuilding have picked up in recent years, the supply of new-build dwellings is still far below Government targets.

Prime marketsThe prime London property market faced a number of headwinds in 2015, led by the increase in stamp duty. Higher transaction costs will continue to weigh on activity and price growth in 2016 as the market absorbs the new rates.

There is a degree of nervousness surrounding global economic events and some reticence following exceptional price growth in some markets in recent years. These factors, combined with the Mayoral election in May, will continue to weigh on demand.

However, the strength of the UK’s economic recovery, continued supply constraints and the diminishing likelihood of a near-term rate rise means price growth will remain positive next year.

The turning point for the prime country property market occurred in early 2013, as prices started to edge upwards. By June 2014 annual growth had reached 5.2%.

However, since then the rate of growth has slowed, partly due to uncertainty surrounding the election but also because the top end of the market is adjusting to stamp duty reform.

Prices remain 14% below their 2007 peak. The price differential between most prime markets and the capital is likely to underpin price growth in 2016.

As the economy continues to recover and house prices outside of London show further growth, the trend for more London buyers to move will gain traction, boosting the ripple effect from the capital.

Please refer to the important notice at the end of this report

Important Notice © Knight Frank LLP 2015 – This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Knight Frank LLP for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank LLP in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank LLP to the form and content within which it appears. Knight Frank LLP is a limited liability partnership registered in England with registered number OC305934. Our registered office is 55 Baker Street, London, W1U 8AN, where you may look at a list of members’ names.

DEVELOPMENT OPPORTUNITIES2015

ECONOMIC FUNDAMENTALS PLANNING POLICY OUTLOOK

RESIDENTIAL RESEARCH

Development Opportunities - 2015

Rental growth in year to Sep 2015

Source: Knight Frank Research / ONS

In prime central London annual price growth slowed to 1% in October, the lowest rate of growth since October 2009. Increased stamp duty charges for transactions worth more than £1.1 million continue to dampen demand at the top end of the London market, and that has led to a stand-off between buyers and sellers.

The top end of the prime Scottish market is still adjusting to the introduction of Land and Buildings Transaction Tax (LBTT) in April this year. The levy, which replaced Stamp Duty Land Tax, has resulted in a significant increase in purchase costs for buyers in the prime market. Prices here fell by 0.7% in Q3, the first decline in two years.

Rental marketAverage rents across Great Britain rose by 2.7% in the year to September, according to the latest data from the Office for National Statistics. Rents increased in all the English regions over this time, as shown in the map above, with the fastest growth, at 4.1%, in London.

Meanwhile, in prime central London Knight Frank’s own data shows that rents eased to 1.5% annual growth in September, down from a high of 4.2% in May. This slowing in prime rents reflects a slowdown in demand for rental property

Knight Frank forecasts cumulative price

growth in prime central London between

2016 and 2020 of 20.5%.

Annual price growth in the prime country

market stands at 2.7% over the year to

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of 5.2%. While the general trend has

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prime urban markets have outperformed

this rate of growth, as examined in the

latest Prime Country Review. Such

outperformance is expected to continue,

underpinned by the improving economic

and employment picture in the regions.

Urban properties outperform Prime urban v prime rural property price growth (nominal)

Price growth in prime central London

Source: Knight Frank Research

Source: Knight Frank Research

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among corporate tenants. Firms are feeling risk-averse due to geo-political concerns and this has caused some companies to curb relocation budgets and recruitment plans.