Mention polarity in the housing market, and most people think about the north-south divide or the gap between established homeowners and those struggling to get on the housing ladder. But in London a new gulf is opening between the rich and the super-rich, as exclusive neighbourhoods such as Belgravia, Mayfair and Chelsea become increasingly detached from the rest of the market.

New research by estate agency Knight Frank, exclusively for The Sunday Times, shows that house prices are shooting up fastest in areas that are already the most expensive in Britain, thanks largely to an influx of foreign buyers. In Belgravia, where prices of flats can exceed £3,000 per square foot, prices rose by a staggering 34.5% last year, while in Chelsea they shot up by 33.8%. Compare those figures with not-so-pukka West Kensington and Bloomsbury, where prices rose by 18.4% and 17.2% respectively.

“A clear relationship between price and performance has emerged: the more expensive the property, the larger the demand and supply imbalance, and consequently the higher the rate of price growth,” says Liam Bailey, Knight Frank’s head of residential research.

Bailey says the normal ripple effect, whereby strong demand spills over to adjacent areas, does not apply in central London’s “super-prime market” (£4m-plus properties). “Buyers in the super-prime market will not compromise by looking at a neighbouring location — they will simply add another £1m to their bid,” he says.

“If you are a successful UK resident with a couple of million to spend, you might be considered wealthy in Surrey or even Wimbledon. But in Belgravia and, increasingly, Chelsea, forget it. You are competing with the über-wealthy, who will pay anything to stay in the best addresses.”

So who are these ultra-rich buyers? Wealthy foreign purchasers were responsible for 60% of all super-prime London sales last year. Most came from Europe (especially Russia, Italy and France), America and the Middle East, attracted by London’s status as a global financial centre, its comparatively benign tax regime, world-class leisure and retail facilities, high-quality residential provision and the draw of a British education. Demand from UK buyers is driven primarily by the City’ s bonuses.

A freehold building split into four flats in Knightsbridge’s Cadogan Place, one of London’s most prestigious streets, was bought by a Lebanese businessman just before Christmas for £9m. The whole deal, from viewing to completion, was sealed within three weeks, according to Richard Gutteridge, a partner at Knight Frank’s Sloane Avenue branch.

“There is now a tier of truly exceptional properties that is attracting the unfettered global super-buyer,” says Peter Young, director of the John D Wood & Co estate agency in Belgravia. “If the property has all the attributes required, namely lateral space, immaculate common areas, security and parking, there is not going to be a prescribed limit on its sale price if more than one super-buyer is on the scene.”

Prices are also being driven up by a chronic lack of supply. Land sales are few and far between, which is having a knock-on effect on building completion rates. In the City of Westminster, which includes Regent’s Park, St John’s Wood, Belgravia and Mayfair, completions fell from 1,315 residential units in 2000 to 503 in 2004-05.

Schemes currently under construction in super-prime areas include One Hyde Park and Montrose Place, while Grosvenor Crescent, the Lots Road power station and Chelsea Barracks represent some of the main development opportunities. The prerequisites for a super-prime home usually include 3,500sq ft-8,000sq ft of living space, striking views and a location within half a mile of Sloane Street’s designer shops.

As the graph shows, the market in Prime Central London underperformed those in Greater London and the UK as a whole for much of the first half of this decade — and actually fell back during the second half of 2002. That all began to change from late 2005, in part due to record City bonuses: prices of £1m-plus properties in central London jumped by 2.6% last month, according to Knight Frank, taking gains for 2006 as a whole to 28.6%, the biggest annual increase since 1979. But £4m-plus properties surged by 4% in December alone.

“Should the economy retain low unemployment and low inflation, demand for property in central London will continue at a very high level well into 2007,” says Bailey. “We are forecasting an additional 10% growth in prices in prime central London and 12% for the most expensive properties.”

The rest of the London market fared less well but still rose last year, according to figures from Haart estate agency. The average price of a home in the capital rose by 0.3% to £257,568 in December, taking gains for the year to 9.3%. Haart expects strong sales activity in the first half of 2007, pushing prices up by a further 8% by the end of June.

“The large number of registrations in Haart’s branches by City workers will be translated into sales in the new year, as Christmas bonuses are invested in buyto-let hot spots in Canary Wharf and the Olympic Village, and in prestigious family homes in Chiswick and Fulham,” says Paul Smith, Haart’s chief executive.

This view is backed by the Nationwide building society. Its latest figures show that London continued to move ahead of other regions in England in the last three months of 2006, with prices rising by 4.1%, compared with the UK average of 3.3%. Prices in the capital rose by 11.3% during 2006 as a whole — more than £75 a day — and are expected to gain another 8%-11% in 2007.

“There is no sign that the market is beginning to cool just yet,” says Fionnuala Earley, Nationwide’s group economist. “The success of the London economy has attracted a large inflow of workers who require accommodation. Looking forward, the provisional building plans for London and the southeast fall far below the expected levels of housing demand suggested by government projections, even those based on conservative immigration assumptions. This suggests that a lack of supply will continue to be a big supporting factor in the London housing market in 2007.”

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