Prices of residential real estate in prime central London appear to have leveled out, after a 15.2% drop since the city’s peak in mid-2014, according to research from real estate adviser Savills, and expert opinion.
Over the next five years, prices of prime properties are expected to increase across the country, rising just over 20% in prime central London and over 10% elsewhere.
But until 2020, when prices should increase by 8%, they’re expected to remain relatively flat, at least in the center of the capital. This represents a purchase opportunity for investors in the next two years, said Lucian Cook, head of residential research at Savills, particularly for international buyers who can take advantage of a currency play.
But opportunity or not, he expects most potential investors will be slow to make a purchase, given uncertainty caused by Brexit and the high cost of entry into the city’s real estate market because of stamp duty land tax increases. “People are likely to remain cautious,” he said.
Analyzing the market today
To explain England’s stagnant residential real estate market today, most experts point to uncertainties around the eventual Brexit outcome and what that will mean for the British economy, as well as the less beneficial tax environment, spurred by changes in the last three years. But there’s more to it than that, Mr. Cook said. And to predict what is going to happen in the future, we first need to look to the past.
“Over the last 40 years,” Mr. Cook said, “London has been transformed into a true world city and global financial sector.” Prices increased an average of 5.7% per year over the rate of inflation—about 2% annually today—between 1979 and 2014.
“This elevation through the global city rankings is something that can only occur once,” Mr. Cook said, noting that today, the city has reached maturity. “What we’ve seen in the past cannot be repeated.”
At the 2014 peak, England was also the best tax haven in the world, said Gary Hersham, principal at London-based Beauchamp Estates. That’s because foreign property investors weren’t liable to pay capital gains or inheritance taxes when they sold a property investment and also didn’t have to pay any extra tax on property purchases, even though they were coming from outside the country. This environment made the country especially appealing to foreign investors.
But when the country was hit with stamp duty land tax changes in 2014 and 2016, which mean that property buyers are marginally taxed 12% for any amount above £1.5 million (US$2.02 million), 10% for values between £925,000 and £1.5 million (US$1.2 million and $2.02 million), 5% between £250,000 and £925,000 (US$335,000 and US$1.2 million), and 2% between £125,000 and £250,000 (US$168,000 and US$336,000), plus an additional 3% for the entire cost of the property if they’re a foreign or a second-home buyer, an immediate and sweeping price correction took place.
If you look at the extent to which prices have dropped since then, Mr. Cook said, they’re now well below what would account for stamp duty taxes. Part of that is because of Brexit uncertainty. Then there are also changes to how capital gains taxes and inheritance taxes are collected, which mean that overseas buyers, regardless of how they structure a deal, are more likely to be liable to pay those taxes than they were in the past, he said.
“These changes take the edge off an investment proposition,” Mr. Cook said, because it means that investors pay more for their property, and when they go to sell it, that they keep less of the gain. “But they don’t undermine the case for the investment completely,” he continued. “It just makes investors more conscious of these factors,” which in turn, impacts the price that they’re willing to pay for the investment to make sense, and usually means the decision to “pull the plug,” so to speak, takes longer.
Looking ahead
Now that they’ve leveled off, prices in prime central London are likely to remain stagnate in 2018, according to Savills, or in the best-case scenario, increase by 2% to 3%, according to Mr. Hersham.
Joel Hughes, the sales manager of Harrods Estates Kensington office, also expects a 2% to 3% increase in prime central London in 2018, based on a slight uptick in activity he’s recently seen.
“We’ve seen that if properties are priced at a realistic level, they’re getting interest close to asking price within a reasonable four- to six-week marketing period,” he said. “There is buyer appetite out there.”
He said most of the worry about Brexit is coming from domestic buyers rather than international investors, who still see prime central London as a safe haven and go-to destination.
Mr. Hersham agreed. “There are a lot of people who still need to get their money into the U.K., and as such, we’re seeing some substantial £50- and £60-million (US$67 million and US$80.7 million) deals being done, and additional interest at that level,” he said, adding that the tax changes, which make it more expensive for foreign buyers to invest in British real estate, “pale in significance when you consider the safety factor of the U.K” —both in terms of a place to safely store wealth, and a place where high net worth individuals know their families will be physically safe.
Savills based their less bullish predictions on the assumption that the current stamp duty taxes remain unchanged over the next five years; that there’s a conservative minority government in place until 2022; that there are bank rate increases of 1.8% by the end of 2022; and that a transitional Brexit agreement is put in place to minimize business disruptions as the U.K. leaves the European Union, resulting in a free-trade agreement with E.U.-based countries.
“What this all means is that recovery over the next five years is likely to be less accentuated than what we’ve seen coming out of previous downturns,” Mr. Cook said.
After remaining flat in 2018, Savills predicts prime central London property prices will increase a modest 2% in 2019, and then grow 8% in 2020, 5.5% in 2021, and 3.5% in 2022, for a total growth of 20.3% over the five-year period.
“This is a recovery on paper that looks quite dramatic,” Mr. Cook said, “but in inflation adjusted terms, prices would remain 4% lower than they were in the backend of 2012.”
Outlook outside of London and for super prime properties
Although almost two-thirds of the almost 400,000 properties worth more than £1 million (US$1.3 million) are in London, and 95% are in the southeast of the country, Savills also compiled market predictions for how prime properties will fare in the rest of the country.
Areas outside of prime central London, where there were less dramatic gains before 2014 and less dramatic drops after, are expected to show less growth. Greater London properties priced above £1 million are expected to increase in value by 10.2% over five years; suburban properties by 12.5%; and properties in the midlands and the north, in pockets such as Cheshire and Yorkshire, by 12.6%.
“These submarkets tend to be more domestic, need-based markets, and therefore, more affected by things like increased interest rates and the availability of mortgage debt,” Mr. Cook said. “They’ve been much less exposed to stamp duty rate increases, so they’ve looked like comparatively better values, that have held onto prices more strongly since 2014.”
Another submarket that’s more difficult to predict is the super prime market for properties that cost more than £10 million.
Regardless of where they’re located, whether that’s in the center of London or the country, Savills chooses not to forecast how the prices of super prime properties will fluctuate, Mr. Cook said.
That’s because this smaller and more niche market is also more volatile, with more international buyers who often pay cash.
