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Coutts London Prime Property Index | Q3 2018

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Summary

High discounts and low competition could make this the right time to buy if you’re in it for the long term.

8 min read

As well as our quarterly review of the capital’s prime property, we compare London with Paris. The two cities have a comradery – and rivalry – that is centuries old. Will Brexit see the London market lose momentum to Paris? We look at the evidence.

-0.8%

Fall in prime property prices since Q2

-5.5%

Fall in number of transactions compared to Q2

52%

Proportion of properties that had their prices marked down by surveyors before sale

  • Chapter 01

    Overview

    Still signs of weakness

    Heading into the final quarter of the year, we find London prime property still showing signs of weakness. Prices remain supressed and sales are sluggish, suggesting that sellers are waiting for a better opportunity while buyers are holding off making big decisions.

    The 2018 budget outlined the government’s plans to impose a 1% stamp duty surcharge on non-resident property buyers. The consultation will be published in January 2019.

    We expect to see a similar effect to what we saw during the last stamp duty hike - buyers flooded the market prior to April 2016 in a bid to avoid the additional payment, artificially inflating prices in the short term. A weak sterling still makes the UK attractive, but it’s becoming a more challenging tax environment for foreign buyers.

    For those with a long-term view, high discounts and low competition amongst buyers mean this could be a great opportunity to buy prime property in the capital.

     

    Markets playing ‘wait and see’

    Sales volumes continue to fall. The number of transactions is down -5.5% from Q2 2018, and -15.8% from the same time last year. Over the longer term, the scale of the fall is starker still with sales volumes falling by a third since 2013. In the last 12 months, the £1 million to £2 million market has seen the highest falls in activity.

    This suggests that many investors have decided to go into wait-and-see mode given the uncertainty surrounding the final stages of Brexit talks. Under these circumstances, we expect the downward trend in sales volumes to continue in the short term.

     

    How low can prices go?

    Prices have fallen for the third consecutive quarter, down -0.8% compared to the previous quarter and -2.1% compared to last year. Consequently, London’s prime property prices are now 14.7% below their 2014 peak.

    Discount rates remain high but have fallen for the third consecutive quarter, suggesting that the tide might be turning. The average prime property discount was -10.8% in Q3, compared with -11.3% in Q2. Super prime properties – those valued at £10 million and above – continue to have a higher discount rate, selling with an average price reduction of -14.6%. 

    Are we nearing the bottom of the market in terms of prices and sales volumes, or is this the new normal? While there are signs of life in the market, we see the long-term trend as relatively flat, suggesting that market levels have reset.

    Mohammad Syed, Head of Asset Management at Coutts, says, “The end of Brexit uncertainty – when it arrives – is likely to release some pent-up demand and see a rise in market activity and prices. But we believe that it will be some time before transaction volumes return to the levels seen in 2013.”

  • Chapter 02

    The Old Smoke vs the City of Lights

    It’s a rivalry as old as the cities themselves – two great European capitals, eyeing each other across the English Channel… or should that be La Manche? Here’s how they compare…

     

     

     

    London

    Paris
    City population 8.825m (1) 2.220m (2)
    City area 1,572 SQ km (607 sq mi) 105 SQ km (41 sq mi)
    % country's population 13.1% (1) 3.3% (2)
    Boroughs / Arrondissements 33 20

    Annual change in price

    (£1m - £10m)

    -2.3% 6.7%

    Annual change in transaction volumes

    (£1m - £10m)

    -15.8% -6.4%

    Average discount on asking price

    (Q3 2018)

    10.8% (3) 3.3%

    Rental Yields

    (Q3 2018)

    3.7% (3) N/A

    (1)    UK population and London borough excluding counties, based on mid-2017 ONS estimates as at Jun-18

    (2)    City of Paris population from 1st January 2017, source: INSEE, Dec-16 and France population based on INSEE estimates as at January 2018

    (3)    Property indicators based on CLPPI postcodes vs. prime Paris, source Coutts/LonRes/ Databiens

    Comparing London and Paris

    Paris and London are ultimately different cities, shaped by their unique histories, geographies and cultures. When comparing the two, it’s worth remembering that they cover very different areas.

    The 20 arrondissements of Paris cover an area that would comparatively range from Fulham to Holloway. Even if we were to limit our price index to inner London, that would still be a larger area than Paris and exclude prime areas such as Richmond and Clapham. On the other hand if we were to extend our view of Paris to the agglomération (or urban area) it would cover about twice the size of Greater London, with over 10m inhabitants, or 16% of the French population.

    There are other differences of course. Sharing a language with the economic powerhouse of the US, for example, favours London’s status as a centre of business, while the euro provides Paris with a trading advantage across the eurozone.

    In terms of prime property, however, the cities have much in common. They are both home to cosmopolitan populations and are great centres of culture that attract global wealth. Both have also enjoyed substantial development in prime property in recent years, with growing property investment potential.

     

    The Paris prime property revival

    Price performance for the prime London and prime Paris markets has recently been inversely correlated – when prices rise in one, they tend to fall in the other. This trend can be seen since the second quarter of 2014, when prime property prices have fallen by almost 15% in London while increasing by 9.5% in Paris.

    Since 2016, prime Paris prices have risen sharply, fuelled by domestic buyers at the top end of the market. Paris luxury property prices reached a four-year peak in Q2 2018, making the French capital appear relatively expensive compared to London. 

    In a rising market, buyers generally have little negotiating power with sellers. This explains why the average discount secured by Parisian buyers is now three times lower than in London.

     

    Will Brexit dent London’s appeal?

    Uncertainty around Brexit negotiations and international workers’ rights undoubtedly puts pressure on London’s status as a preferred destination for business, especially with financial services. In parallel, Paris continues to try to tempt more international business to set up there, citing plentiful office space, tax benefits for expatriates and increasingly flexible labour laws.

    However, any suggestion that Brexit could lead to a worker exodus is by no means inevitable.

    Hakan Enver, Managing Director at professional service recruitment company Morgan McKinley Financial Services, says, “There is no doubt that ongoing negotiations around the future of Brexit are having an impact on employment in London. That said, the number of senior executive roles in London does not seem to have been affected. Regardless of how unclear things are, ensuring the right senior executives are hired will always be of the utmost importance.”

    Looking beyond Brexit, Enver believes that London’s place as a centre for technology, finance, and the creative industries will continue to support employment. “What comes with this multitude of sectors are the huge volumes of job opportunities,” he says. “When compared to the difficulties in employment and vacancy numbers in other European countries, such as Italy, Greece and Spain, it is evident why London is a preferred destination.”

     

    London still calling

    Overall, we believe that key characteristics of the UK will continue to support the economy and property market, both in London and beyond. The UK is ranked 7th on the World ‘Ease of Doing Business’ Index according to World Bank Group and performs consistently strongly across multiple categories, including dealing with construction, obtaining permits, resolving insolvency and obtaining credit. France, by comparison, is ranked 29th.

    On top of this are the lifestyle factors that are so hard to match elsewhere: a world-class education system, comparative security and vast green spaces, as well as the international dynamic, extensive entertainment options and world-renowned restaurants and bars.

    Looking at property prices as they stand, we think it’s possible that prices in Paris have peaked, whereas Brexit jitters have suppressed prices in London. If London’s appeal – for business and for lifestyle reasons – continues to endure, then we believe London has the potential to offer a stronger long-term return than Paris. 

  • Chapter 03

    Local trends

    West still best

    With our index showing a fall of -0.8% in prime property prices for the quarter, the only areas showing positive annual price growth were in Chelsea, Kensington, Notting Hill & Holland Park, St John’s Wood, and Regent’s Park & Primrose Hill.

    On a longer-term view, performance is very mixed across prime London markets. Fulham & Earl’s Court is -23.4% below peak values in 2014, while prices in Wimbledon, Richmond, Putney & Barnes are just -6.0% below peak values.

    Central London has seen prices fall back this quarter, but this is in part due to fewer sales – smaller sample sizes can often knock results.

     

    Premier postcodes pinch pole position

    Mayfair & St James’s continues to hold the title as most expensive area to buy on a price per sq foot basis. It has remained top of our list for the last four quarters, just ahead of its closest rivals in Knightsbridge and Belgravia.

    Property in Mayfair and St James’s is selling at the fastest pace too, within 134 days on average. The most sluggish market, by comparison, is Bayswater & Maida Vale where sales take on average 188 days.

    With transaction volumes down -15.8% annually across our index, Hammersmith & Chiswick has suffered the most this year, down -44.1%. Transactions in Chelsea and Knightsbridge & Belgravia have roughly halved since 2014.

    At the top of the market (£10m+), transactions in the last quarter were centred around Chelsea, closely followed by Kensington, Notting Hill & Holland Park.

    “Over the last 12 months, we have seen 52% of valuations marked down by surveyors (often referred to as down-valuation risk), with averages ranging from 2.2% to 7.8% across prime London markets.”
    George Toumbev, Head of Lending Propositions, Coutts.

    Family homes still sought after

    Areas such as Wimbledon, Richmond, Putney & Barnes and Hammersmith & Chiswick are showing relatively low discounts. We believe this is because of demand from domestic buyers seeking family homes in these desirable residential areas, although low transaction volumes are also playing a part in skewing the numbers.

    The highest discounts came in South Kensington where buyers are getting an average -15.2% off the original asking price.

     

    Buyers beware of down-valuation risk

    In a market where house prices are falling, property valuations coming in lower-than-expected are not uncommon. Our Postcode Selector tool will give you an idea of how prices are performing in the areas you are interested in.

    George Toumbev, Head of Lending Propositions at Coutts, highlighted the risk of valuations being revised downward by surveyors before purchase. He says, “Over the last 12 months we have seen 52% of valuations marked down by surveyors (often referred to as down-valuation risk), with averages ranging from 2.2% to 7.8% across prime London markets.”

     

    Down-valuations can be a major headache for buyers. If the bank won’t provide lending to match an offer price, buyers can find themselves either having to provide extra capital themselves, or forced to abandon the purchase entirely. It can also be an opportunity, however, and in some cases, we have seen clients renegotiate with agents as a result of down-valuations and secure a better deal.

    George Toumbev adds, “We recognise the importance of having strong relationships with valuation surveyors, which means that we can often get an indication of market value before an offer is made. In addition, it’s important to have access to a range of flexible and customised solutions, like those offered by Coutts, that can accommodate down-valuations.” 

     

    How we can help you buy your home

    At Coutts we recognise that property is the most significant asset many of us own. We will take the time to understand your objectives and build the right team to help you make informed property decisions.

    We are able to design a lending solution tailored to your needs, or provide access to Coutts pre-selected panel of leading UK residential buying agents who can find you some of the most exceptional UK residential properties.

    To find out more about how we can help, speak to your private banker or call Coutts 24 on 020 7957 2424.

     

  • Chapter 04

    Interactive Map & Postcode Selector Tool


    Use the map and postcode selector below to see how your area performed last quarter.

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Key Takeaways

It’s a difficult environment for investors looking to make short-term gains due to limited capital growth prospects, an onerous taxation regime, concerns over Brexit and oversupply of new build homes. Longer term, the traditional strengths of the UK, in particularly London, with respect to being a great place to conduct business and rule of law mean the outlook for residential property remains positive in our view. This is especially the case for US dollar and euro denominated buyers thanks to the current weakness of sterling.

About Coutts Real Estate

With significant experience in the real estate market, Coutts real estate experts draw on a clear understanding of our clients' property investment objectives, extensive connections and expertise to provide a consolidated service that meets their needs.

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