Buyer interest in prime London markets such as Kensington is rising

Penthouse C1, at the top of the Albion Riverside development in south-west London, has just gone on the market for £4.75m. The owner, a contemporary art dealer and collector who has lived at the address for 18 months, was pleasantly surprised by the valuation. He bought the property – a modern apartment with a terrace overlooking the river Thames – at the end of 2007, close to the peak of the UK capital’s housing market. But it has since risen in value, defying the sharp price falls nearly everywhere else.

“I was expecting the worst but three valuations came in ahead of my expectations,” says the seller, who uses the penthouse to showcase his impressive art collection.

He thinks the flat has held its value because of its scale – it has four large bedrooms, a 40ft glass-fronted reception with a mezzanine lounge and double-height ceilings – as well as its location and rarity. “They are not building these any more,” he says. “And there haven’t been any on the market. I bought the last one the developer had.”

His experience is indicative of a broader trend emerging at the top end of London’s property market. This segment has generally been hit as hard – if not harder – than mid- and lower-end properties as potential buyers watched their bonuses dry up and stock market wealth destroyed. Many estate agents have seen multi-million-pound homes lose a third of their value in the past 18 months. But some high quality, hard-to-come-by apartments and houses priced under £10m have proved more resilient.

For a time it seemed the so-called “prime central” London market would emerge unscathed from the housing downturn. Properties worth £5m-£10m rose 48 per cent in value in 2006 and 2007, those over £10m increased by 77 per cent and the rally continued well into last year, even as values in the rest of the UK tumbled, according to estate agency Savills. But the boom finally came to a halt when the City was rocked by a wave of high-profile bankruptcies and bank rescue deals. Savills now expects average residential prices in top London neighbourhoods to fall 30 per cent from their peak. “Ultra-prime” houses that sell for £10m-plus have already lost 22 per cent of their value since last summer.

Still, the declines seem to be easing. Prime central prices fell by 4 per cent in the first quarter of this year, half the fall seen in the final quarter of 2008, according to Savills. Hamptons International, another London estate agency, meanwhile saw a slight recovery – of 0.5 per cent – over the same period.

But there are disparities within this rarefied market. Charles McDowell, the agent selling the Albion penthouse, thinks, for example, that homes worth more than £10m will suffer most. “The top end in London was the most inflated market and people feel prices have further to fall there,” he explains. “Meanwhile the mid-market – £5m-£10m – is seeing a bit of a recovery and properties worth £5m or less are seeing interest from overseas buyers, [with] the best selling for not far off what they were in 2007.”

Buyer confidence is also creeping back. Agents say registrations in the prime London market doubled over the past quarter and are leading to more sales. Hamptons, for example, received double as many offers in Chelsea and Knightsbridge this March as it did in the same period last year.

Much of the interest is coming from foreign buyers with euros, yen or dollars, who are enjoying discounts of up to 50 per cent thanks to the combined effect of falling property values and a weak pound. But even with these discounts, wealthy Europeans and Russians have softened their ambitions. Savills says they are showing interest in flats worth £750,000-£2m in premier Knightsbridge addresses, whereas before they were looking at ones listed at £5m-£10m.

Properties priced at more than £10m are scarce in the current market and very few deals are being done – although there are some good bargains at that level. McDowell is marketing a four-storey house in Tregunter Road, one of the most sought after locations in Chelsea, for £10m, about £5m less than he thinks it would have sold for at the peak. Another property – a highly desirable townhouse in Belgravia, recently redeveloped by Finchatton – came on to the market in January with an asking price of £25m and sold one month later for something over £20m.

“Would that house have sold for £30m at the top of the market? Yes, probably,” says Alex Michelin, a director at Finchatton. “But that is a pretty quick selling time in any market, let alone a tough market, and shows people are realising the world goes on. The property has to be really special [and] the other thing is realistic pricing. People are more conscious about what they are spending and don’t want to pay over the odds. They are no longer willing to spend whatever it takes to get what they want.”

McDowell agrees that househunters are being increasingly selective. “Buyers can afford to be more demanding,” he says. “If they are going to pay close to full price, the property needs to be flawless, with a freehold or long lease and in the right location.”

The “right” locations for most prime buyers are Knightsbridge, Kensington, Chelsea and Belgravia. “People are positioning themselves in these areas for a recovery,” he adds.

The same is true in the UK’s most popular second-home markets, particularly in coastal areas of the south-east and south-west, where many wealthy Londoners have palatial retreats.

These areas have been hit hard by the recession too. Piers Vaux at Property Vision, which acts as an agent for buyers, says homes worth up to £1.5m in Devon and Cornwall have fallen by 20-25 per cent, in line with the UK as a whole, while more expensive properties in the prime coastal markets such as South Hams (pictured right) in Devon have lost as much as 40 per cent of their value.

“The bigger properties have been worst hit,” he says. “Houses that in 2007 were coming on to the market for around £5m are now around £3.5m.”

This was partly due to a massive decline in interest from holiday-house buyers. “In 2007, 90 per cent of our business would have been people buying second homes but last year three quarters of buyers were looking for primary residences,” Vaux says. Now, however, “the balance is starting to come back as people don’t think prices have that much further to fall.”

David Adams at estate agency Chesterton Humberts confirms that trade is picking up at the lower end of the market – homes in the £350,000-£1m range – in top areas. “People in this market do want to sell, particularly those who have seen a reduction in income and are trying to find some way to reduce their exposure to the mortgage market,” he says.

Savills also reports increasing activity in popular towns such as Salcombe and Dartmouth in South Hams, and Rock, on the north coast of Cornwall, which have a wide range of properties and so appeal to buyers looking to spend up to £500,000. In St Austell, south-east Cornwall, a development of three cottages in the popular Charlestown Harbour area recently attracted seven viewings and two offers before it was even officially on the market.

But Richard Addington at Savills’ branch in Exeter, Devon, says that the higher end has been hampered by a lack of supply as sellers try to wait out the downturn. “For someone with £1m-£2m to spend in Devon or Cornwall, the choice is very, very thin.”

He points to St Mawes, a small coastal town on the south coast of Cornwall and one of the most expensive places in the region. He expected prices to collapse quite dramatically when owners, many of whom work in the financial sector, were forced to sell. “A second home may be the obvious thing to get rid of,” he explains. But he was wrong. “The overriding characteristic is that there is very little trade. St Mawes [still] has probably the highest prices anywhere in the west country. There are no cheap houses.”

Adams also sees a stand-off between buyers and sellers. “People are being very selective about how much they are willing to pay. They are still concerned where prices are going in the south-west and if they have taken a big hit on their property in London, they are not going to pay a high price for a property in Cornwall,” he says. Meanwhile, “sellers there think they are somehow immune. There is a lack of understanding as to the size of the correction that has occurred elsewhere.”

Still, there is some movement even in the above-£1m market, with homes listed at 25 per cent below their peak value now selling fairly quickly at or close to the asking price, according to Addington. He points to a penthouse apartment in Salcombe priced at £1.75m, a full £1m below the original asking price, and says he expects it to attract offers. “Buyers are beginning to sense that we are at, or close to, the bottom,” he says. “And it is certainly the case that the best properties will resist further falls.”

Sharlene Goff is the FT’s deputy personal finance editor, based in London

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Estate agencies
Savills, tel: +44 (0)207584 8585
Hamptons International, +44 (0)207758 8488
Property Vision, +44 (0)207823 8388
Chesterton Humberts, +44(0)203040 8240

Developer
Finchatton, +44 (0)207591 2700