In the latest Knight Frank Prime Central London Index (July 2007), the company has attributed the ‘disappearance’ of property as an important factor in continued price rises. Residential property prices in prime central London increased by 3.9% in July the highest monthly rate of growth since the start of the firm’s index in 1976. The annualised rate at 36.4% in the 12 months to July is also the highest annual rate since mid 1979.

Liam Bailey, head of residential research, says: “We have seen a phenomenal market in central London in recent years - led by a strong City economy, very healthy bonus rounds and growing employment and population levels in London. But this is only one half of the story - the demand side.

“On the supply side we have seen the strong demand requirements met by very constrained property availability - stock levels in Q2 2007 were 11% below the same period in 2006 and 23% below the same period in 2005. Add into the mix rising domestic wealth and rising foreign wealth coming into the country we can see why prices have risen strongly.

“But let’s look under the surface and try to understand why supply is so constrained. One of the most significant issues has been increased foreign ownership. Over 61% of all property sales over £4m in central London go to foreign buyers. However, unlike most domestic buyers, foreign buyers tend not to be releasing a property into the market when they purchase. They increasingly follow a different pattern (to UK buyers) by buying and then holding properties for much longer periods of time - therefore we see properties ‘disappear’ from the market.

“The traditional pattern of ownership was much closer to the following scenario: the foreign buyer would arrive in the UK to take up a work contract and purchase for occupation for the period of their employment. Following the termination of their contact they would move back to the US or Europe etc. Now the pattern has changed with the foreign buyer much more likely to hold onto their property for a longer period as an investment even following their return to their home country.

“For example, in 2004 an average foreign landlord letting a property after first having occupied it would only hold it for an average of 9 months before sale. In 2007 the figure was 20 months ... and rising.”