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Research reveals that values of prime residential property in central London continued to fall in the third quarter of 2008. Across the prime markets, values fell by 3.7 per cent in the quarter, to bring annual falls to 12.1 per cent.

“The London market has been quick to react to the prospect of falls in City employment and earnings, and the sectors of the market most reliant on demand from the financial and business services continue to be those most severely affected,” says Lucian Cook, director, Savills Research. “These falls are in line with our central forecast that values will fall by 15 percent over the course of the year.”

Where old money and international demand are more prevalent, the falls have been far less severe. This is reflected in the fact that values in the core of prime central London, such as Knightsbridge, Mayfair, Chelsea and Belgravia, have fallen by just 7.1 percent in the year to date, compared to 16.1 percent in Kensington – traditionally a destination of choice for senior City and financial employees.”

In line with past downturns, the market for flats (with the exception of the most exclusive end of the market) in prime central London has been more affected than the market for houses. In the areas of south west London favoured by City employees – the likes of Barnes, Fulham, Wandsworth and Clapham – values fell by 16.5 per cent over the course of the past year. Here, supply and demand is a key factor and vendors, many with large equity buffers, have quickly accepted that values have fallen.

In contrast with the rest of the UK, rental values in prime central London have recorded the first quarterly fall since the second quarter of 2003, down 1.4 percent, again reflecting the weakened employment outlook in the City.

Renting has become the favoured option for many house movers, but the resulting increased demand has been insufficient to make up for the combined impact of reduced demand from the City and increased supply from those forced to let houses as selling has become more difficult.

The imbalance between supply and demand has been most acute in the rental markets to the east of the City, where rents are now 4.6 percent lower than at the same time last year.

In the period to the end of June, the super prime markets dominated by multimillionaires, where average prices are in the order of 5m pounds, showed far greater resilience than the merely prime and held value. At the same time, in the ultra prime market, where values average 15m pounds and where demand comes from the international billionaire community, growth continued.

That picture of resilience is beginning to show some very early cracks. In the third quarter, the falls in the super prime market were contained at 1.8 percent. In contrast, the ultra prime property held value, showing marginal growth at 0.6 percent, albeit well down from 4.2 percent seen in the equivalent quarter of last year.

Lucian Cook says: “We expect this market to be more resilient going forward, as it is driven by a growing number of global billionaires. Market conditions will undoubtedly be tougher than at the height of the market in 2006 and 2007, but we still do not anticipate big falls in value.”

“Evidence from previous downturns is that the very top of the market does eventually soften,” says Jonathan Hewlett, director of Savills London. “However, to a large extent we are dealing with the unknown. The very top end of the market is more global than ever before, and it is currently holding up better than expected, although we are just beginning to see signs of the market slowing.

Having said that, this is a rarefied marketplace and while we don’t expect many records to be smashed in the coming months, we will most certainly not see any distressed sellers either.”