Will Brexit mean bargains for homebuyers?
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The wailing and the weeping is impressive for such a sanguine nation but, before the UK howls itself into a Brexit-based residential property catastrophe, we have polished the collective crystal ball to look at a few themes in this sea of uncertainty around the high-end market in London and south-east England.
Right now is a great time to buy for many international buyers. The fall in sterling means that dollar buyers earlier this week effectively enjoyed an 11 per cent discount compared with the day of the referendum vote. It is also a great time for some domestic buyers thanks to almost non-existent interest rates.
That said, both Savills and Knight Frank have been warning for several months that London’s prime market, historically more volatile than the rest of the country, would bear the brunt of the early Brexit fallout. This is the sector with the highest concentration of non-UK owners. In April the rating agency Moody’s estimated that foreign nationals accounted for 49 per cent of sales of homes worth £1m and above. With Britain experiencing its biggest political experiment in a generation, it is likely that, villains or saviours, this group will play a pivotal role.
Are they likely to exit because of Brexit? Few of London’s super-rich consider the UK’s membership of Europe’s single market as a factor in choosing a London home, according to Trevor Abrahmsohn, of Glentree Estates, who estimates that non-EU international buyers make up 70 to 80 per cent of this market. “These buyers do not care where Europe is at and they don’t believe for a second that Brexit means that London’s status as a property safe haven is at risk.”
Indeed, following the financial crisis when the UK and Europe were wobbling, these buyers didn’t seem to care. Super-prime Mayfair is a favourite destination for many of them — at £2,300 per sq ft, according to Savills, average prices here are 18 per cent above the average in the rest of prime central London. From Mayfair’s pricing low point in March 2009 to the end of 2012, a period spanning the end of the UK recession and the darkest days of the eurozone crisis, foreign buyers’ appetite helped Mayfair prices gain 61 per cent, far outstripping the 28 per cent prime central London average, according to Savills.
The priorities for this group of buyers were — and remain — personal safety, the rule of law, a favourable tax regime, good private schools and the great British tradition of political and economic stability, says Mark Parkinson of buying agent Middleton Advisors. While the Brexit turmoil appears, by British standards, to jeopardise the last of these factors, it is worth considering what these buyers are often used to elsewhere: capital controls in China and, increasingly, Russia; the president’s impeachment and worst recession for decades in Brazil; a sinking oil price driving the first ever government bond issue in Saudi Arabia.
Besides, for this group the fall in sterling goes much of the way towards offsetting the stamp duty rise introduced in December 2014 (now peaking at 15 per cent on any amount above the first £1.5m for a second home), says Naomi Heaton, chief executive of London Central Portfolio Limited, which manages close to £1bn in prime central London property.
Brexit could, however, spell trouble for European bankers who have made their home in London. If the UK does leave the single market, many may find themselves posted abroad. Jefferies, the US investment bank, estimated before the referendum that an exit could see 100,000 banking jobs relocated to Europe. All but 500 of Goldman Sachs’ 6,500-strong European workforce are based in London.
They may not be in a rush to sell their homes if they can avoid it. This is hardly a time for dollar or euro investors to realise gains on London property. Earlier this week, a weaker pound meant that the average Kensington & Chelsea home (valued at £1.315m) was worth roughly £110,000 less than on the day of the referendum vote for those banking in euros. Dollar owners, meanwhile, were £144,000 poorer.
Even if continental Europeans start deserting the capital, the impact could be muted: only a third of prime London buyers from abroad are from the EU, according to Savills. Collectively, non-European international buyers are responsible for a fifth of all second-hand prime sales.
For international buyers with the stomach for the volatility that may be in store, buying, rather than selling, looks appealing. The downward lurch in sterling in the wake of the Brexit vote was the steep dismount at the end of a steady slide. Over the past six months, the combined effect of changes in average property values and shifts in exchange rates, has seen London’s 5 per cent most expensive properties get 13 per cent cheaper for euro buyers, and 10 per cent cheaper for those with dollars, according to Hometrack. Over the same period sterling owners in this property elite have seen gains of 1 per cent.
The impact on London’s high-end, new-build market is hard to call but the supply-and-demand equation looks obvious: large numbers of units are coming on stream at the same time as prime central London prices are falling.
About 19,000 new homes were under construction in inner London in May — 43 per cent more than 18 months earlier, according to research for the FT by Property Vision, a buying agency, and Dataloft, a research company. A total of 6,249 of them were located in SW8, says Anthony Codling of Jefferies, which includes the prime developments peppering Nine Elms Lane and Battersea Power Station. Codling adds that two-thirds of homes on sale in SW8 today are new — the second highest rate of any London postcode.
Flighty buyers from abroad could threaten prices. Local agents say the new developments — where buyers typically put down between 10 per cent and 20 per cent at exchange and the rest when the homes are completed — have proved very popular with individual investors from Malaysia and China.
With London’s prime market cooling — average prices in prime central London have dropped 8 per cent since their peak in October 2014, according to Savills — many are now selling on the secondary market in order to avoid losses, says Johnny Male, of local agent Daniel Cobb.
Developers dismiss the claims. The average gain for resales in the development of Battersea Power Station — where 1,500 flats have been sold since January 2013 — is 30 per cent, according to the developer Battersea Power Station Development Company. But it would not reveal resale price changes since October 2014 when London’s prime market started falling.
Heaton believes that average prices across the area’s prime new-builds will fall 20 per over the next two to three years.
Either way, deals are being struck according to some agents. “[Since the referendum] overseas investors have been coming forward with discounts on their offers,” says Nanette Hung of CBRE, the agent selling One Nine Elms, which will include London’s tallest residential building, and Nine Elms Point. “We have been doing a lot of haggling.”
If haggling is not your thing then the sub-£1m market in central London is worth examining. This represents half of the total housing stock, by number of properties, so there is plenty to choose from, particularly in places such as Bayswater, Pimlico, Paddington and Victoria.
In the immediate future the big question is, as Judith Evans — the FT’s property correspondent — puts it, “whether the new speculative investors will outweigh the people exiting, or those put off relocating to London, because of Brexit”.
Longer term, a positive outlook seems likely because London will probably hang on to its “world city” status. High employment levels may take a drubbing but some of its other world city qualities look like they will remain intact: a forgiving political and physical climate, English as the main language, good IT sector, handy timezone, flourishing arts, lush parkland and excellent global connections.
One final thought. If prices in London and the south-east do fall more into line with properties in the rest of the country, even if only slightly, there is some cause for celebration. In some areas of the UK prices have never recovered to their pre-financial crisis levels. And while prices in the Midlands and the North have sunk 12.5 per cent since their 2007 peak, prime London has soared 35.2 per cent over the same period, according to Savills.
As the referendum has vividly demonstrated, extreme inequality fractures society which is no good for anyone or anything, let alone the economy.
FT writers on what could happen next
From a state of near-overheating, Brexit has cast a sudden chill over the property market in London and the south-east. Early indications are that people are thinking more carefully before committing to large mortgages or moving to bigger homes. Some analysts predict prices will fall, others that they will flatten, but it seems clear the days of double-digit annual price rises have come to an end.
FT Alphaville reporter
On one hand, London property just got a lot cheaper for foreign buyers at the same time that the capital’s offshore financial centre status vis-à-vis the rest of the world may have got a boost. On the other hand, it may see demand cut in half as workers flock back to the continent. While news from estate agents is mixed, concerns are growing for the buy-to-let and rental market. The view here is that an independent UK is unlikely to turn away high-skilled workers or the rich. More realistically the low-skilled sector will be affected, most of whom rent rather than buy.
There should be a tumbleweed or two bowling around Canary Wharf, as investment banks relocate staff to the continent. High-end property in the Docklands, or with good transport links to it, should get a lot cheaper. Upmarket apartments across London should become more affordable. Whether they are decent investments depends on whether you believe the capital will continue to thrive if and when the UK quits the EU.
In recent years, mainland Chinese citizens have overtaken Russian citizens as the single biggest group of foreign buyers of London real estate. With the pound hitting historic lows, the rush by Chinese and other Asian investors is likely to accelerate.
Merryn Somerset Webb
Editor-in-chief of MoneyWeek
Property in central London was overvalued before the referendum vote. And it is still overvalued now. The good news? It is getting less overvalued.
Central London property prices have long been out of reach for ordinary mortals and Brexit won’t change that. Paris may be pricey but London is ludicrous. Brexit is a potentially huge opportunity for the French capital to attract international banks and other financial institutions but there is a dearth of high-quality, centrally located office space. If the big banks do decide to move to Paris, they may have to get used to the idea of being in La Défense or other areas outside the capital’s city limits.
Digital comment editor
We will only find out the full economic impact of Brexit in a few months’ time, but construction is already slowing and the housing market looks unstable. Although a fall in house prices would help those in my generation who have struggled to get on the ladder, the particular issue in London — high demand, low supply — remains unresolved. It is up to Sadiq Khan, the new London mayor, and the government to get building.
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