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Might London prime property prices be bottoming out?

By Citi Private Bank,

September 27, 2018Posted InReal Estate

The prices of London’s finest homes continue to suffer from a nasty case of subsidence. Since 2014, prime central London homes – defined as properties worth more than £1m are estimated to have sunk 7.2% in value according to Knight Frank Global Research. The number of such properties changing hands has also declined by 21%. It all looks very different to the period between 2009 and 2014, where prices rose 68% and volumes rose 144%. So, what has undermined the market and what might reverse the trend?

“Prime central London was definitely a sellers’ market until around 2013 or 2014,” says Ollie Marshall, director of Brooks Marshall, a private independent property agency specializing in prime central London homes. “Demand had been running ahead of supply, but the two reached a sort of equilibrium around then. However, the government raised the top rate of stamp duty [a transaction tax paid by purchasers of UK homes] to 15%. Transaction levels suffered immediately and prices followed.”

The UK’s shock vote to leave the European Union in June 2016 came as a further blow to the prime residential London market. As a result of Brexit, there is a substantial risk that some financial sector employees may have to relocate to rival cities on the European mainland. Some high-earning EU nationals working in finance and other industries have also reported feeling less welcome in the UK since the referendum, and have said that they may leave.  The risk of reduced demand from an important segment of buyers has clearly depressed sentiment further.

The uncertainty over Brexit persists. With only around seven months till the UK formally exits the EU, there is little clarity about what the future relationship between the two will look like. This may dissuade buyers from making offers. “The uncertainty is worse than any actual news,” says Mr Marshall. “Hopefully, though, a Brexit deal will be struck. And once it is, that should start to be reflected in prime London property negotiations.”

Despite the uncertainty, prime central London property have lately shown some encouraging signs of life. “Overall, our data shows that prime sales volumes are now up for the first time since 2013,” says Mr Marshall. “In the past five months or so, we’ve had around half a dozen transactions of around £20 million or more. Such levels have been unheard of for the last four years. As people realize that liquidity is returning, they should feel greater confidence that the price reductions are over.”

Pricing in London has indeed suffered significantly in recent years. “Prices are back to where they were during the global financial crisis,” says Mr Marshall. “Overall, we may be down some 25% from where we were at the peak in 2014. We tracked a 5-bedroom modern, new build house in Chelsea that was originally priced at £30m but eventually sold for £16.5m. For a dollar-based buyer, the opportunity would have been even greater, given the decline in the pound over the period. The total discount after currency effects might have been as much as 60%.”

With the British pound remaining weak – and tentative signs of an upturn in the prime market – some insiders like Mr Marshall believe that it may be a good time to invest once more. “The downturn in London is now around four years old, which makes it quite a long one by past standards,” says Mr Marshall. “We believe one of the clear lessons of recent decades is that price falls of 25%-30% have generally made good entry-points.”