Following an onslaught of news reporting that London is no longer in the top 10 cities in Europe for property investment and that the number of first-time house buyers in Britain is falling, a long shadow has been cast on London’s status as an international property hotspot. Investors’ fears over a property market bubble on the verge of bursting have been exacerbated by the looming stamp duty deadline in April. However, Tal Orly, CEO of Cogress, the open equity investment platform for property, making investment accessible and transparent, takes a decidedly different stance, and shares his top reasons why investors can be sure that London will continue to be a property investment hotspot that offers the best ROIs.
By basing reports on cheap housing prices, the influence of traditional prime property investment in London is ignored
The most recent Emerging Trends in Real Estate report released by PWC and the Urban Land Institute, which is calling for yield compression in the UK capital predicts quite negative investment prospects for London. However, this report by basing its analysis on cheap housing prices ignores the astonishing growth that Prime Central London (PCL) housing has been experienced year-on-year. The common consensus is that house prices have flattened out across the United Kingdom over most of 2015 and now into 2016. Nevertheless, a string of recent UK house price indices, such as the latest one produced by Nationwide, have proven that this is a mere misconception.
What has in fact slowed down is only the acceleration of the percentage increase in house prices – when a vehicle slows its speed down from 70mph to 30mph it’s still moving forward, although the driver may feel a dip in adrenaline.
This softening growth is no reason to panic because on a month-on-month basis we are still seeing prices continue to rise. It is unlikely that this is to change anytime soon, which means that the market remains healthy and will keep price surges brisk. Moreover, higher rates of stamp duty may boost the market, as people rush to complete transactions before the changes come into force in April this year.
Undoubtedly levels of expectation among sellers, and the estate agents who are controlling these property sales have changed, which is arguably an adjustment for the better. In a bull property market, expectations always intensify and vendors can become greedy. However, the deceleration of house prices has produced more realistic asking prices on the open market. When the market was at its peak between 2012-2014, the gap between ‘asking prices’ and ‘sold prices’ was at its largest. In some areas of prime London, sellers experienced a staggering 50% difference between what they asked for and what the property actually sold for. So, people asking for £1.5m sold the property at an achieved price of £1.0m. There should be no doubt that this represented an unhealthy state of affairs, which is quite rightly being corrected in today’s bear market.
The fringe regions of the capital will form the main driver of price growth in 2016.
Good news emerges from the fringe regions of the capital, as they are becoming the main driver of price growth in 2016. Price differentials between London and the commuter zone have been widening significantly in the past 10 years. Locations such as Oxford, Reading, Guildford, Winchester, Maidstone, Chelmsford and Cambridge have held up well amongst the variety of commuter belt cities in the South East of England. Growth in these regions show no signs of slowing down as Cross Rail and HS2 will only further add to their popularity among City workers looking for cheaper housing alternatives.
In these inexpensive areas, which are less affected by economic and political changes, the new stamp duty rates will be significantly lower than those required in inner London, so it’s likely that they will continue to blossom and maintain their growth.
For example, a four bedroom family house in Chelsea is worth circa £6,000,000 and the stamp duty is £633,750 – well over 10% of the purchase price. In comparison, the same size house in Guildford is worth closer to £1 million with a considerably lower stamp duty of £43,750, which is just over 4% of the purchase price. We can expect that the tax change may impact buyers in London who will find the London commuter zone to be an extremely attractive option for purchasing a property.
With demand outpacing supply, prices will still rise
All of the above will certainly impact the London property market with knock-on effects that may cause buyers, sellers and lenders to act cautiously. However, the bottom-line remains that the demand for property in the capital continues to outpace supply. The substantial imbalance between supply and demand is set to persist and will maintain upward pressure on house prices in 2016. This demand is sure to be amplified by London’s booming population with the city’s projected population set to surpass 10 million by 2030 thanks to a flourishing economy, a rising birth rate and a falling death rate. Contemporary forecasts that call for the fall of London’s property market miss the fact that property investment has been and continues to be a long-term project. Ultimately, these factors illustrate just how resilient and robust the residential property market is in London and the greater South East area. And this is undoubtedly, reassuring news to the ears of unnerved investors.