Capability Brown

 

The London property market is likely to remain subdued while Brexit negotiations develop, but we expect the outer boroughs to perform better than the prime central London boroughs again this year.

With the ‘spring market’ approaching we are likely to see the usual seasonal increase in activity, but in a subdued environment the main challenge for buyers could be a limited supply of new stock.  Many private landlords are still reluctant to put their properties on the market given an uncertain outlook.

If they are not forced sellers, landlords may be reluctant to have to sell at a discount. We see evidence that many landlords are continuing to rent properties instead. As a result, prime central London (PCL), especially at the higher price brackets, has become more of a tenants’ market.

While transactions across London remain subdued, there are certainly some sub-sectors performing better than others.  PCL’s discretionary luxury new-build segment has been particularly hard hit as a result of the higher rate of Stamp Duty Land Tax (SDLT) and the 3% SDLT surcharge.

The changes to Inheritance Tax (IHT) for overseas investors have also had a negative impact on this market. The UK Treasury has confirmed that from April 2017, the scope of existing IHT legislation will be widened to look through offshore structures and capture underlying UK residential property assets. Charged at a rate of up to 40% of an individual estate, the measure will apply to UK residential property, irrespective of whether a property is rented or retained for own use. This will apply to any chargeable event taking place after 5 April 2017 with no grandfathering for existing structures. We believe this is likely to dampen enthusiasm among overseas investors. 

We remain cautious on the new-build sector, where developers are looking for a premium over older stock and in certain areas where there is an acute over-supply of commodity-style property.

Greater London performed better than PCL last year, and we believe that this trend will continue throughout 2017. Prices in the outer boroughs are starting from a lower base, so there is greater potential for price rises. Transportation infrastructure developments are also giving a boost to areas that will benefit from these improved connections with central London.

For instance, next year the Elizabeth Line is due to open between Paddington and Abbey Wood, Liverpool Street to Shenfield and Paddington Main Line to Heathrow Terminal 4. The Northern Line extension is due to open in 2020 from Kennington to Battersea Power Station. There are also proposals for a Bakerloo Line extension and Crossrail 2, but we don’t see these making any big impact on house prices just yet.

The property ladder is becoming shorter too, as buyers seek to avoid excessive transaction costs by skipping the lower rungs. The average age of first time buyers has increased from 30 to 33 over the past 20 years, according to the Office of National Statistics. This later start means that some first-time buyers are skipping the apartment rung on the ladder, instead jumping straight into the small-family-home rung. The main factor that could eventually limit this trend is the more domestic nature of the Greater London market, as prices reach a ceiling in terms of affordability.

Below are some of the latest predictions from the leading agents in the UK.

 

London – Price Growth Predictions

Knight Frank 
Prime Central London London
  East** West***  
2017 1.0% 0.0% 2017 -1.0%
2018 3.5% 1.1% 2018 2.0%
2019 3.0% 1.5% 2019 2.5%
2020 3.5% 3.0% 2020 3.0%
2021 4.0% 3.0% 2021 5.5%
2017-2021 15.9% 8.8% 2017-2021 12.5%

** City & Fringe, Islington, Tower Bridge, King's Cross and Riverside

*** Notting Hill, Kensington, South Kensington, Chelsea, Knightsbridge, Belgravia, Hyde Park, Marylebone, Mayfair, St John's Wood

Savills
Prime Central London London
2017 0.0% 2017 0.0%
2018 0.0% 2018 3.0%
2019 8.0% 2019 4.5%
2020 5.0% 2020 2.0%
2021 6.5% 2021 1.0%
2017-2021 21% 2017-2021 11.0%
JLL
Prime Central London London
2017 0.0% 2017 1.0%
2018 1.0% 2018 2.0%
2019 3.0% 2019 3.0%
2020 5.5% 2020 5.0%
2021 5.0% 2021 7.0%
2017-2021 15.2% 2017-2021 19.2%

Although the central London market has been hit hardest by SDLT, the 3% SDLT surcharge and Brexit uncertainties, PCL is a global asset class whose performance is more aligned to international factors than the rest of London. We believe the wider appeal offered by London’s unique global business centre, its world leading education system, and its rich cultural attractions should continue to attract international investors. 

Overall, we expect 2017 to be another slow year for London property transactions, with Brexit negotiations giving discretionary buyers an excuse not to act, leaving needs-driven buyers to dominate. For some, fear that property investments might go down in value could stop them from buying in the first place, but at current interest rates, the real (inflation-adjusted) value of cash deposits is being eroded. As such, in our view investors looking to preserve wealth should consider assets that have the potential to provide inflation-beating returns over the long term.

If you require further information regarding the residential real estate service we offer, please contact Katherine O'Shea.

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