Prime London Residential Markets

Prime London Residential Markets
 
Brexit and what it means for prime London

21 September 2016, by Katy Warrick

Taxation and post-referendum caution are set to shape the capital’s prime residential market

 

There is an adage that old age comes at an inconvenient time. For the unquestionably mature prime housing markets of London there was never going to be a convenient time for a vote to leave the EU. But in order to understand their prospects it is important to get a handle on their relative strength prior to the EU referendum.

THE STARTING POINT

The prime London housing markets entered a new phase in the middle of 2014. Following a period of strong growth, during which they absorbed a series of tax increases but were left looking fairly fully priced, values initially plateaued. They then adjusted in line with the further stamp duty rises introduced in December 2014.

In the aftermath of these changes, and in the run up to the EU referendum, the direction of travel differed between subsectors of the market. Lower value stock showed modest price growth, mid value property values broadly flatlined and values of high value stock gradually declined further.

In this period taxation continued to shape the market. Though the additional stamp duty costs of 2014 were broadly factored into values, increased exposure to other capital taxes for non-UK owners also weighed upon the market.

A further 3% stamp duty surcharge for second homes and investment stock caused a spike of activity in the run up to its introduction on 1 April 2016. Thereafter it combined with pre-referendum uncertainty to subdue the market.

As a consequence, prices in prime central London were -8.1% below their 2014 peak immediately prior to the referendum. Across the remainder of the prime London housing market they had risen by a modest 1.7% over the same period.

Importantly, successive tax changes made the market less fluid and increasingly restricted activity to the most committed buyers and sellers.

FIGURE 1

Challenges and opportunities in the prime London market

 
Figure 12

Source: Savills Research

EARLY INDICATIONS

At this stage, the market is yet to show its hand in response to the Brexit vote.

The summer market was slow but not moribund. The unexpectedly swift appointment of a new Prime Minister removed a major potential source of uncertainty. In addition, weakened sterling has supported overseas demand in the new build market. A further 0.25% cut in interest rate has benefited domestic buyers, particularly beyond central London.

There is certainly not the sense that the impact of the vote to leave the EU is likely to be as severe as in the early 1990s when the cost of debt spiralled, or the 2008 financial crisis when the Sword of Damocles hung over the banking industry.

Though there are clear differences in terms of cost of debt and the tax environment, at this stage the position looks more reminiscent of the period from 2002 to 2004. Then, following a bull run, the market was affected by a less significant financial shock which combined with an uncertain geopolitical backdrop. Prices fell by 10%.

LOOKING FORWARD

As we move forward prime London markets will continue to be shaped by pre-existing constraints. The changed tax environment means buyers will commit only when they are confident that a property is rare, exceptional or represents good value for money, particularly as the risk environment has increased. As a result the market remains exposed to fluctuations in buyer sentiment and general economic pressures resulting from the vote to leave the EU.

This points to a slow market over the remainder of 2016 as buyers wait to see how negotiations to leave the EU proceed and the precise economic impact becomes clearer. This brings with it the prospect of further price adjustments, as the market finds a level which brings buyers back to the table in greater numbers.

This will present some opportunities for those prepared to take a long-term investment view and who have put themselves in a strong position to buy, but will require sellers to be fleet of foot in responding to a market that is likely to distinguish between the best stock in the best locations, good quality prime housing and the merely average.


LONDON AS A FINANCIAL CENTRE

How will Brexit affect the capital’s global standing?

The most critical economic factor for London is how the decision to leave the EU will affect the UK’s standing as a world city and global financial centre. There is much speculation about the extent to which banks decide or are forced to relocate some of their activity to within the EU.

This will depend on whether and, if so how quickly, the British Government can protect the passporting rights needed for the City to provide a full range of banking and financial services across the EU. There are a number of factors that work in London’s favour.

The UK Government will almost certainly attach significant importance to protecting the City of London in its negotiations. There are also proposed EU regulations, due to come into force in January 2018, that would protect London’s position, provided it offers an equivalent regulatory environment to the EU.

What remains clear is that no other European city has the infrastructure to match London as a financial centre. We have therefore assumed that London will retain its position as the main European global financial centre without a substantial loss of jobs or relocation of banking activities.

FIGURE 2

Prime London five-year capital values forecast

 
Figure 2

Source: Savills Research

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