ECONOMIC UNCERTAINTY HITS HOME
2017 was the year that the property press, house builders and owners, finally acknowledged the slowdown in the London
property market. London’s prime central areas began to slow in late 2014, when stamp duty unexpectedly shot up and the
deceleration continued through 2015 and 2016.
The Government’s difficulties with Brexit negotiations together with a marginal rise in interest rates in November for the first time in a decade, did little to lift the mood. There was some good news in the Autumn Budget on November 22nd when the Chancellor announced that first time buyers would be exempt from Stamp Duty on the first £300,000.
After three challenging years in the residential market, prices across Midtown, City and East London are now back at 2013/2014 levels. Our mainstream markets, between £500,000 and £1 million, had price falls of 4% in 2017 after having held their values in the first 6 months of the year. Larger properties priced above £1m experienced corrections of up to 10%.
Across the West End, Bloomsbury, Kings Cross, Clerkenwell, the City, Shoreditch, Canary Wharf and East London we sense that the economic uncertainty triggered by unpredictable Brexit negotiations, has served to dent buyer confidence and reinforce a wait-and-see attitude.
That wait-and-see attitude has helped foster a new-found equilibrium in London’s property market, characterised by
‘low demand and low supply’. That said, there are still new opportunities for buyers who have the patience to track properties coming to the market. We noticed that the level of viewings which had reached a low point in 2016, started to recover in 2017. Serious buyers were able to buy with little competition and, while transaction numbers remained low, owners seem to have a much greater understanding of the need to be realistic in their price expectations.
All of this will be welcome news to the Government who have used Stamp Duty to calm what they saw as an overheated housing
market, and at the same time raise additional revenue.
Of course, the property industry is united in its call for reform of Stamp Duty. The scale of acquisition costs is unprecedented in the UK market and buyers are constantly taken by surprise when they realise the impact of tax on their buying power. Price reductions attract bargain-hunters but they are disappointed when they find that the price saving would be swallowed up by the tax bill. Falls of 25% above £2 million have had little effect and have not yet been enough to kick-start the market.
At the same time the Government pursues an anti-landlord agenda by targeting second home owners and the Buy To Let
market. Second home owners are increasingly being blamed for the UK’s housing shortage and there are rumours that further tax measures could be in store for private landlords. Across London v75% of all new build in the past 10 years has been sold to investors and second home owners.
Having introduced an additional 3% Stamp Duty levy for second home buyers and investors in April 2016 the government now
has existing landlords in its sights. The list of measures so far includes: reductions in tax relief on mortgage payments, new regulation, tougher lending criteria for buy to let – including higher rental income requirements, and if that were not enough, local authorities are also targeting this sector with compulsory licensing fees for landlords. This cocktail of measures has been successful in reducing demand from investors looking to plan for their retirement, add to their portfolios or enter the market for the first time in central London. There are higher costs still to come with the ban on tenants’ fees including references, lease agreements and inventory costs.
At the same time Government continues to promote large scale institutional investment in the Private Rental Sector (PRS)
as one of the solutions to the UK’s housing crisis. We now have plentiful supply of rented stock across London, with PRS
landlords starting to release more units in major development hubs at Wembley, Croydon, Stratford, Canary Wharf, Vauxhall and Battersea in addition to stock coming on stream in zones 2-5 via Permitted Development Rights (PDR) (zone 1 is largely excluded from PD) which allow the automatic conversion of commercial buildings into homes without planning consent. This level of supply will mean rents remain stable in London and make it difficult for landlords to pass on additional costs by way of rent increases to tenants. This increase in supply does not apply to other regions where new homes are desperately required.
So we have an increasingly pro-PRS and anti-small landlord regulatory environment.
Developers have their sights on two categories of buyer – Chinese and institutional PRS investors. Chinese still value an opportunity to put money into the UK and London’s residential market, most often to provide a home for family members studying at London universities. The weak pound has helped to support this segment of the market. Developers have a need to sell completed stock but also to maintain headline prices, so the incentive to help out with buying costs – and their capacity to do so – is much greater than for other types of vendors.
House Builders have also been packaging up portfolios of new apartments to sell to institutional investors and, although the
stock might not be ideal for the purpose, it provides a faster route to market for the institutions than Build to Rent (BTR) which involves a long and complex process of land acquisition, planning, design, construction and development finance. There is now an interesting landscape emerging in which large corporate landlords will be competing with individual or small scale landlords.
The big winners as previously highlighted in our reports are renters. Despite the headlines bemoaning high rents in London,
the quality of rental product has improved almost beyond recognition over the last decade while the cost has risen only gently.
Telephone: 020 7250 1012
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