Brexit and what it means for Prime Central London
Following the Brexit vote, London’s prime residential markets will need to adapt and adjust to a number of challenges including taxation and post-referendum caution
In the three months since the EU referendum it is a good time to review how exit vote has affected PCL residential real estate. If we go to the starting point the prime London housing markets entered a new phase in the middle of 2014. Following a period of strong growth, during which they absorbed a series of tax increases but were left looking fairly fully priced, values initially plateaued. They then adjusted in line with the further stamp duty rises introduced in December 2014.
In the aftermath of these changes, and in the run up to the EU referendum, the direction of travel differed between subsectors of the market. Lower value stock showed modest price growth, mid value property values broadly flatlined and values of high value stock gradually declined further.
In this period taxation continued to shape the market. Though the additional stamp duty costs of 2014 were broadly factored into values, increased exposure to other capital taxes for non-UK owners also weighed upon the market.
A further 3% stamp duty surcharge for second homes and investment stock caused a spike of activity in the run up to its introduction on 1 April 2016. Thereafter it combined with pre-referendum uncertainty to subdue the market.
As a consequence, prices in prime central London were -8.1% below their 2014 peak immediately prior to the referendum. Across the remainder of the prime London housing market they had risen by a modest 1.7% over the same period.
Importantly, successive tax changes made the market less fluid and increasingly restricted activity to the most committed buyers and sellers.
At this stage, the market is yet to show its hand in response to the Brexit vote.
The summer market was slow but not moribund. The unexpectedly swift appointment of a new Prime Minister removed a major potential source of uncertainty. In addition, weakened sterling has supported overseas demand in the new build market. A further 0.25% cut in interest rate has benefited domestic buyers, particularly beyond central London.
There is certainly not the sense that the impact of the vote to leave the EU is likely to be as severe as in the early 1990s when the cost of debt spiralled, or the 2008 financial crisis when the Sword of Damocles hung over the banking industry.
Though there are clear differences in terms of cost of debt and the tax environment, at this stage the position looks more reminiscent of the period from 2002 to 2004. Then, following a bull run, the market was affected by a less significant financial shock which combined with an uncertain geopolitical backdrop. Prices fell by 10%.
As we move forward prime London markets will continue to be shaped by pre-existing constraints. The changed tax environment means buyers will commit only when they are confident that a property is rare, exceptional or represents good value for money, particularly as the risk environment has increased. As a result the market remains exposed to fluctuations in buyer sentiment and general economic pressures resulting from the vote to leave the EU.
This points to a slow market over the remainder of 2016 as buyers wait to see how negotiations to leave the EU proceed and the precise economic impact becomes clearer. This brings with it the prospect of further price adjustments, as the market finds a level which brings buyers back to the table in greater numbers.
This will present some opportunities for those prepared to take a long-term investment view and who have put themselves in a strong position to buy, but will require sellers to be fleet of foot in responding to a market that is likely to distinguish between the best stock in the best locations, good quality prime housing and the merely average.
Source: Savills Research www.savills.co.uk