Prime property market in London set to be affected most by Brexit

The prime property market in London is likely to be the affected the most by the referendum results in the UK which will see the country leave the European Union.

Sales activity and price growth in the prime London residential market have already both slowed since the middle of 2014 and in the run up to the historic vote many commentators and experts were predicting that a vote to leave would affect London the most.

‘There is no doubt that the vote in favour of Brexit will generate a period of renewed uncertainty in the prime London residential market. Some demand, especially from investors, will be delayed and in some cases redirected to other markets although the significance of these trends should not be overstated,’ said Liam Bailey of international real estate firm Knight Frank.

He explained that demand for prime London property rests on a wide range of drivers most of which are unaffected by the referendum decision such as the scale of London’s business cluster, depth of skills, education, lifestyle and language.

‘It is not easy to identify an obvious alternative destination for investors despite short term nervousness. On the eve of the vote the pound sat 14% below its mid-2014 peak meaning pricing in the prime market was more attractive for dollar buyers. While a further weakening of the pound could increase inward investment, this impact will be constrained by the fact that around 80% of central London buyers are UK residents,’ he pointed out.

‘It seems a reasonable assumption to make that interest rates will be lower for longer, despite the risk of imported inflation from a weaker pound. While the long term benefit of ultra-low interest rates on the housing market may be questionable, in the short term they will act to underpin demand especially for equity rich buyers with access to the best funding rates,’ he added.

Bailey also believes that the prime country house market will be similarly impacted by the result. ‘However while the market has performed relatively well over recent years, following a slow recovery immediately after the financial crisis, prices have not tracked London to date and there is scope for some outperformance in the short to medium term,’ he said.

‘While we are entering a period of renewed uncertainty in the UK and London market, ongoing issues around EU and especially Eurozone stability, which will be highlighted in the run up to French and German elections, are likely to counter this risk and shore-up London’s safe haven appeal,’ he concluded.

The decision to leave has opened up a Pandora’s Box as far as the London property market is concerned and for overseas buyers, this big and dramatic drop in the value of Sterling will effectively offset the Stamp Duty and tax adjustments and it will make prime London property a lucrative investment for overseas investors bold enough to make a decision to buy despite the market uncertainty, according to Peter Wetherell, chief executive of Wetherell.

‘This is a market for risk takers and people able to spot high risk, but potentially lucrative opportunities that have emerged overnight due to the fluxes in the markets. Dollar based Middle East and Asian investors in particular will now look at short term buying opportunities in the central London property market and look at acquiring residential property priced up to £6 million,’ he said.

He believes that the Prime Minister, Chancellor and Governor of the Bank of England will now need to act boldly and decisively to stop this exit from the EU from potentially leading to a ‘two-speed’ London property market.

‘Now that UK will not be part of the EU in the future then industry construction costs could rise by up to 15% since currently construction materials imported from and exported to the EU are free of duty and taxes. Many site/construction staff working in London are people who originate from countries across the EU the future of all of this will need to be looked at quickly and decisively,’ he pointed out.
He also pointed out that currently some 39% of London’s population of 8.66 million people were not born in the UK. For Mayfair and the West End, some 55% of the market is based on non-EU overseas buyers who are from the Middle East, India, Russia and Africa. The West End is far less reliant on the EU, so he believes it will continue, maybe at a lower volume or maybe at a higher volume, dependent on volatility in local political markets around the world.

But he is predicting that in West London and Inner North London where there are high levels of EU buyers there could now be a dramatic slowdown which could last for a number of years.
‘The end result of this decision to exit the EU could be a two speed London property market with just the core West End, and the periphery continuing to operate but with stagnation across the West, North and East London sectors of the market,’ said Wetherell.
He suggests that in order to protect the long term interests of the London property market the Prime Minister and Chancellor will urgently need to review Stamp Duty and also seriously consider reversals of the various tax changes that have already challenged the central London market over the last few years.
‘After the last global recession overseas investors and London’s developers worked together and should be applauded for finding the resources to continue developments and the success of London. So since it’s been done once before, I have every confidence that the London property market is strong, robust and able to rise to challenges,’ he concluded.
Adam Challis, head of residential research at JLL, also believes that the London housing market will feel the effects of the decision more deeply. ‘The interconnected trading relationship between London and the rest of Europe means the implications are more complex. This will exacerbate the uncertainty for London’s home owners,’ he said.

‘Paradoxically, investors may well identify opportunities in this market over the short term, particularly international purchasers that can benefit from the currency arbitrage that has opened up by a weaker pound sterling,’ he added.

He is also concerned that domestic politics will now be the key risk to the housing market. ‘The UK has a deep housing supply imbalance and concerted attention from politicians to deliver credible, lasting solutions to the supply conundrum is desperately needed. Protracted infighting within the UK’s political parties will only harm the UK economy and any chance of a timely recovery from the expected economic slowdown,’ he added.
The immediate impact is likely to be a fall in housing turnover and a rapid deceleration in house price growth as buyers adopt a wait and see attitude, according to Richard Donnell, director at Hometrack.

He too believes that the impact will be most keenly felt in the London housing market which is fully valued and already facing headwinds. ‘History shows that external shocks can reduce sales volumes by as much as 20% with sales volumes already down over the last year. House price growth is already weak and running in low single digits in central London areas and modest price falls now appear likely in higher value markets as prices adjust in the face of lower sales activity,’ he explained.

‘Even a sharp fall in the Sterling is unlikely to attract overseas buyers in the near term. Across London, where house price growth is running at 13%, we expect the rate of growth to slow rapidly on greater uncertainty and market activity in the capital is set to remain disrupted until consumers and the financial markets can see a clear strategy to manage the process to a position where the outlook for the economy, jobs and mortgage rates becomes clearer,’ he added.

Islay Robinson, chief executive officer of Enness Private Clients, pointed out that as the practicalities of a separation may take years to implement this could leave the market in a limbo state and foreign investors are likely to continue to hold off to see how the UK performs on its own.

‘Those market participants who were waiting for the outcome may continue to stall until the picture is clearer. Prices will depend on how supply is affected by falling foreign investment and continuing domestic demand,’ he said.

‘With just under 50% of central London investors being foreign, we’d expect prices to flatten in the short to medium term. On the other hand, if sterling plummets dramatically, the UK market will become far cheaper for foreign investors, making it a more attractive prospect,’ he explained.