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Perspectives

Prime London housing after Brexit

Tim Bowring

By Tim Bowring

Head of Real Estate and Private Equity – Europe, Middle East and Africa

Emma Gilbert, Real Estate and Private Equity Specialist - EMEA

August 25, 2016Posted InWealth Advisory, Investments and Real Estate

The UK’s vote to leave the European Union on 23 June has sent shockwaves through financial markets globally. But what is ‘Brexit’ likely to mean for prime residential real estate in central London, one of the favored locations for wealthy buyers from the EU and the rest of the world for many years? To get an expert insight into some of the most important issues and potential risks and opportunities, we met up on 29 July with Ollie Marshall, Director of Brooks Marshall, a private independent property agency specializing in prime central London homes.

 

CPB

Prior to the ‘Brexit’ vote, some media coverage seemed to imply prime central London housing was experiencing a boom. Do you agree with that view?

 

BM No. We think what was happening in the prime central market pre-Brexit has been misrepresented. The most publicly-available surveyors’ data and house-price indexes tend to look at London as a whole, including many non-prime, lower-priced properties. This data tends to be somewhat out of date by the time it actually appears. Also, it contains homes in outlying, “up-and-coming” areas that were doing quite well and this was making the overall picture in the market look healthier.

As a company, we specialize in prime central London. Traditionally, this was defined as neighborhoods like Mayfair, Belgravia, and Kensington & Chelsea. But it’s expanded in recent years to incorporate areas like Notting Hill, Bayswater, and Marylebone. The reality is that prime central London has been in a price-correction for about two years. Since the peak in 2014, we see pricing down around 10-15%.

 

CPB

And how do you see current sentiment towards the prime central London market since Brexit?

 

BM

Well, it’s only been a few weeks since the vote. But in the week immediately after the result, sentiment was seriously negative. There was a huge shock factor in financial markets all over the world, with sharp moves seen in currencies particularly. Since then, though, financial markets have picked up, and we believe sentiment towards prime central London housing has recovered somewhat.

That said, there’s still quite a bit of uncertainty. For example, we just don’t know yet whether the UK will retain its access to Europe’s single market, and in particular keep its ‘passporting rights’ in the European financial sector. The financial services industry is so important to London and if it loses those rights, it may well impact levels of employment among bankers and asset managers, in turn affecting London house prices.

What we are seeing already, though, is an upturn in the number of opportunistic buyers in the market. The decline of the British pound since the Brexit vote has made some distressed prime properties on the market look even more attractive to potential buyers. For instance, we’ve handled one house that went up for sale in 2014 for £12m and which has just gone under offer for £6.9m.

 

CPB

The British pound has dropped from US$1.50 just ahead of the vote to around US$1.32 today. How is that affecting demand from overseas buyers?

 

BM

Sterling’s decline is important. What it’s done is to make some of the existing distressed opportunities look even more interesting. There’s one property that was originally up for sale at £22.5m but whose asking-price is down to £14m. Factoring in sterling’s weakness against the dollar and the total reduction for a US dollar-denominated buyer could be as much as 53%.

 

CPB

How much distress in the market is there since Brexit and might it get worse?

 

BM

We haven’t seen any distress that’s specifically as a result of Brexit. Instead, there are individual cases of distress for other reasons. And in the prime central London markets we deal with, we don’t expect to see a wave of distress going forward. In the eight years since the financial crisis, the availability of debt has been much more restricted, so the price-gains in the market haven’t been driven by increasing leverage, in our view. Cash purchases have been the dominant feature. Still, we may see some sales from sellers for whom Brexit is a final straw, coming on top of the uncertainty from all the many tax changes that have affected the market in recent years.

 

CPB

Let’s talk a bit more about those other changes. What are they and what’s their impact been?

 

BM

The year 2014 was really significant for the Prime Central London market. There were already some early signs of buyer exhaustion after some five years of rising prices. And then the government decided to implement a number of key changes to the taxation of housing, which especially affected foreign owners of high-end properties held through offshore trusts and companies.

The most important change was the overhaul of the system of stamp duty – the tax payable when purchasing a UK property. Stamp duty on more expensive properties increased sharply as a result of this overhaul. And it hurt transactions of homes worth between £3m to £5m in particular. Activity at this end of the market has been subdued ever since.

Other changes included imposing capital gains tax upon foreign owners of UK houses and new rules governing mortgages. Investors were also fearful that the Labour Party would introduce a special annual levy on expensive homes if it won the 2015 General Election. In fact, the Conservatives won and many realty agents thought that this would help reignite the top of the market but it did not.

 

CPB

So what might happen next?

 

BM

People have been waiting for the dust to settle following the Brexit vote. The next big issues for potential buyers will be when the government gives formal notification of the UK’s intention to quit the European Union and also whether the UK’s financial sector will retain its existing access to European markets. These things could become apparent sooner than people may imagine.

We would not be surprised if there was some move in relation to stamp duty. The fall in transactions on expensive houses has hit the government’s tax-take, so there’s an obvious incentive to try and reverse this with some further reforms. There’s some lobbying of the government going on about this right now.

 

CPB

And what about prices of prime central London property?

 

BM

Offers are definitely being cut since the Brexit vote. We’ve obviously seen cases where buyers lower their offers by between 10% and 15%. So, buyers right now are behaving opportunistically.

Property developers may be particularly keen to negotiate on their selling prices as they have financing commitments to meet and also want to release capital in order to take advantage of lower buying prices themselves.

 

CPB

Is there more interest in London property now from overseas buyers?

 

BM

Certainly the evidence we’re seeing is that there is. There have been high-value transactions lately involving buyers from the US, Pakistan, Australia, Kuwait, Qatar and Saudi Arabia. We’ve also detected a pick-up in enquiries from China. The revival of US interest is striking, as Americans haven’t been big buyers here in some time. They may have been tempted by those potential discounts of around 50% on certain properties, once currency moves are taken into account.

 

CPB

What about the talk of oversupply in the market? There’s been a lot of new building in recent years hasn’t there?

 

BM

There has certainly been some over-exuberance from developers, which has created a significant overhang in parts of the market, but importantly not all parts of it. We are very bearish, for example, on the high-density new-build market. That means the very large developments of new apartments in places like the Nine Elms and Earl’s Court districts.

There is a substantial wave of new properties coming onto the market in these sorts of places in the coming years. Many of the buyers of these apartments have been investors from Asia, who bought directly from the developers off-plan and who are now trying to sell their investments ahead of the properties being completed.

We know of a case where there are no fewer than 87 re-sales occurring in one building of largely identical flats. This creates substantial downward pressure on prices. We think the solution will eventually come from institutional investors like pension funds coming in and buying large packages of properties at substantial discounts. For individual investors, this market isn’t something we would recommend at all, though.

In the prime neighborhoods where we operate, however, there has not been anything like the same levels of new development. So a potential strategy would be to look for individual distressed opportunities in the likes of Belgravia, Knightsbridge and Mayfair, where there aren’t these large overhangs of new stock.

 

CPB

What is your outlook for these parts of the market then?

 

BM

We’ll find out soon enough whether the UK will keep its single-market access and financial passporting rights. The new Prime Minister – Theresa May – understands the financial industry’s importance to London’s economy and of passporting rights. So I’d hazard a guess we might get clarity here in the next six months or so.

As to the outlook for pricing, we’ve seen some very forthright predictions of a coming London property market correction from some leading institutions in recent weeks. What people may not realize, however, is that this correction is already happening in certain circumstances, in the sort of distressed situations we’ve discussed. But we do not expect to see the same levels of distress and value as we did in 2009 because this is a very different market and there’s much more regulation of debt and leverage. So, positioning early for highly selective opportunities would be our preferred approach.

 

CPB

Thanks for sharing your insights with us.

 

BM

 It's been a pleasure.

 

The opinions expressed by the speaker during the course of this interview are those of the speaker or of the company that the speaker represents. These opinions may differ from the opinions expressed by Citigroup or any of the businesses of Citigroup .Inc. It is intended for informational purposes only and does not constitute a solicitation to buy or sell securities.

Citi Private Bank operates a referral program to clients in Asia and Europe, the Middle East and Africa to offer external assistance in the purchase and disposal of residential real estate, and Brooks Marshall is one firm to which we refer clients.

Citi Private Bank Asia Pacific and its representatives are not licensed under the Estate Agents Ordinance (Chapter 511 of the Laws of Hong Kong) or under the Estate Agents Act 2010 (Chapter 95A of the Laws of Singapore) and will not be providing any property related advice or work in relation to any type of properties, regardless of location.

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