The past twelve months have seen an unprecedented chain of events that sent shockwaves through the UK economy and property market. From changes in stamp duty, to the fallout from the EU referendum and US election, the volatility in our currency and stock markets has been unnerving. The culmination of these factors has resulted in house prices and commercial rents experiencing slower growth in the capital.
Now, as Theresa May prepares to negotiate the terms of our exit from the EU, we need to take stock of the reality facing the UK property market. While it’s hard to predict the long-term impact of Brexit without knowing the kind of trade deal we secure with EU, we have seen positive signs that London is in good shape to withstand any potential blowback.
Of course, there is still uncertainty surrounding how many potential financial services companies & jobs may relocate to other European cities. Despite this, global powerhouses like Apple, Facebook, and Snapchat have made long-term corporate commitments to London that should help boost investor confidence in the future prospects of the property market. London has a fundamental appeal that few (if any) global cities can match. The city offers a centralised time zone, prominent academic institutions, a thriving creative & tech hub and a hospitable tax environment that means it will remain an attractive proposition for businesses and people. More broadly still, the Uk remains one of the top three cities to invest in (behind the US and China), partly attributed to London’s global position as a leading business and cultural hub.
London’s financial resilience is likely to be mirrored in the property market. We do expect that properties above £1,000,000 – particularly valued between £1,000,000 and £5,000,000 – will continue to slow, as prime central areas like Chelsea and Kensington have already reported a 10-15% drop in prices since the referendum. However, these declining transaction levels will be offset by properties valued below £1,000,000, which have continued to trade well.
This indicates a difference between one’s ‘need’ for property and one’s ‘want’ for property. There is a large disparity between supply and demand for property in London, as the city’s population grows at a much faster rate than homes are built. This means that competition will remain fierce for properties at the more affordable end of the market even against Brexit uncertainty. We’ve seen a trend in investor demand moving away from luxury central London property to multi-unit schemes that are sensibly priced in the greater London area. As well, low levels of supply will not only buoy housing prices, but also stoke buyer demand for alternative locations across the UK that offer better yields, like Oxford, Manchester, and Bristol.
Relief for the upper echelons of the UK property market may well come from the depreciating pound that has made the exchange rate on property very favourable to foreign buyers. Many central London estate agents have been reporting that a large portion of their applicants are $-based buyers hoping to take advantage of the currency fluctuations to secure valuable long-term property assets in London.
Investor confidence will also likely be supported by the relative stability we expect to see with the stamp duty remaining at current levels over the next few years. This should help give buyers confidence to return to the higher end of the market without the threat of increased taxes on future transactions.
2016 made clear that predictions are a dangerous game. Even so, we would expect that the short-term volatility Brexit will bring to the UK economy to be tempered by the property market’s strong foundations. For buyers and investors willing to take the long-term view on the property market, Brexit is an opportunity to gain a footing in a market that has historically been one of the nation’s most resilience in times of uncertainty.
*As published at the Institutional Real Estate bin May 2017.