Is the London property market ready to banish the Brexit blues?
Despite a lingering mood of uncertainty, many experts expect the capital to ride out the anticipated turbulence
Imagine watching a time-lapse film showing the changing face of London’s skyline. An endless succession of construction sites would appear alongside the River Thames, cranes and diggers coming and going, gleaming steel and glass buildings rising into the air.
The redevelopment of areas such as Canary Wharf and South Bank is central to London’s modern-day identity. And, over the years, investors from Singapore to Russia have proven willing buyers for the city’s ever expanding portfolio of prime property, be it terraced townhouses in Chelsea or new-build penthouse apartments in Battersea.
But in June 2016 a political event shook the UK, bringing with it a new addition to the English language: Brexit.
The electorate narrowly voted to leave the European Union after 23 years as a member and negotiations regarding the exit deal are ongoing, but the result is likely to result huge change on many levels; political, economic, social and cultural.
The property market in the capital is of course not immune to the fallout.
Prices for luxury homes in central London …. will flat line for the next 24 months as Brexit uncertainty and tax changes affect the market, according to a report published by global real estate agency Savills in September.
“Uncertainty fuelled by Brexit and a weakened government mandate since the June election [when the ruling Conservative Party failed to win an outright majority that many had deemed as inevitable] means sentiment is fragile,” Lucian Cook, head of UK residential research at Savills, says.
The slowdown is especially pertinent to London, given its position at the top of the UK luxury property tree. Savills estimates there were 394,000 properties worth GBP1 million (USD1.33 million) or more across the UK in 2016 – and almost two-thirds of those homes are in London. In Kensington and Chelsea in west London, almost half of all privately owned homes exceed the GBP1 million mark.
The Savills report does predict that prices will start to recover towards the end of 2019, rising by 2 percent, with a stronger bounce back of 8 percent in 2020.
David Galman is director of sales at Galliard Homes, which has spearheaded successful property developments in areas including the Docklands, Bermondsey, and Shoreditch.
Galman acknowledges that Brexit “is an uncertainty” but cites other factors that were already affecting the prime property market including the introduction, in early 2016, of higher rates of stamp duty on additional residential properties, such as buy-to-let properties and second homes.
“But, demand is stronger than I’d have anticipated. And this is across the board, all the way up to the prime market,” he says.
“There’s a different volume of demand. I might get 20 viewings a week for a property at a quarter of a million pounds, and two viewings a week for a scheme at two million pounds. And that makes obvious economic sense, there is less demand at the top. There is still movement in the prime market, especially in regeneration areas and near to transport links.”
Current popular prime London locations include St John’s Wood, Wapping, Shoreditch, the redeveloped King’s Cross area, and Canary Wharf, with the latter two having the added appeal of being near Crossrail, a cross London service which will connect Berkshire, Essex and Heathrow Airport with the capital, which opens fully in 2018.
According to Galman, demand from Asia remains strong. Singaporeans, Malaysians and investors from Hong Kong have long been London-centric in terms of buying property. In more recent years, interest from Chinese buyers has inevitably been on the increase. About 25 percent of Galliard Homes’ business currently comes from Asia, he adds.
“I think that will increase in the next few years because they will want to take advantage of the weaker pound, which is probably here to stay. And it’s a huge advantage for investors outside of the UK.”
The current exchange rate certainly presents a mix of fortunes depending on perspective; it’s a gloomy outlook for those who trade and buy in sterling, but great news for investors from around the world. Following a wobble in 2016, there has been renewed interest from investors outside the UK thanks to the low pound.
“Overseas investors have been encouraged by the favourable exchange rate and canny buyers have been waiting to see if the exchange rate gets any lower,” Jennet Siebrits, head of residential research at CBRE, says. “And they’ve found that, more or less, the rate has reached its floor.
“We are definitely in a better place than 2016 and Brexit doesn’t appear to be a major factor for our buyers.”
These notes of optimism are perhaps best understood when examining the context of London’s rise to global player in the property field. Between 1979 and 2014 the prime central London market delivered average annual house price growth of 5.7 percent above the rate of inflation. The so-called ‘promotion’ phase from 1979 was characterised by the emergence of London as a premier world financial centre. The deregulation of the financial sector in 1986 enabled a massive expansion and business owners, bankers and traders started to arrive from overseas, boosting demand for homes in the city centre.
As London developed as a world city, so it became a magnet for increasingly wealthy individuals from around the globe. Although its property market took a severe hit during the financial crisis in 2007, a secure foundation aided its recovery.
Galman believes that weathering financial storms is part and parcel of the property development business.
“We’ve enough experience to know that, despite Brexit or the like, the market can and will turn,” he says. “And I don’t feel too worried about it. I was having lunch with a client last week at my office in Canary Wharf, and we were looking out at all of these gleaming towers.
“The headlines suggest that people are going to up sticks and move to Frankfurt or Paris, but it’s a bit of a myth. Economically it makes sense for them to have their HQ here and for them to work here, and so they’re going to want to buy property here. The fact is, London still has a very strong draw.”
CBRE’s Siebrits says she is optimistic for two main reasons. “Firstly, I’m an economist. I look at evidence of the past and how the market has gone up and down. We always say to our investors, look at the long term. Property is not a liquid asset and you need to be able to withstand the shocks. There may be downturns but if you hold onto a property for 10 years you’ll get growth.
“The other thing is, we’re actually a very resilient economy. There’s a lot of talk at the moment about financial services and how they are at risk from Brexit. Actually this sector is a small part of our economy. Since the financial crisis, there has been a blossoming in the technical and creative industries in London. There are more than 440,000 employees in these sectors. These people need places to live.”
Also keeping the London market regular is healthy demand from Hong Kong and China, largely on the back of education. Five percent of overseas students in London are from China, according to Siebrits.
Although Brexit will continue to have an influence on the prime property market, other factors – with pros and cons – are also at play. And while there is always potential for upheaval, there is always room for recovery.
“London will almost certainly remain a key global financial centre and can develop as a key European hubs for the growing tech sector,” Savills’ Cook says.
“This means London’s prime housing stock will continue to benefit from new sources of domestic wealth generation, as well as attracting wealthy overseas buyers. Returns in the future will reflect this low-risk world status.”
It would appear that when prime London real estate once again represents identifiably good value and the fog of uncertainty clears, further growth is inevitable. In other words, the time-lapse movie is a long way from completion.