A weak pound bodes well for dollar-based buyers, but supply remains low.
New Prime Minister Boris Johnson just might be the most significant wild card in the U.K.’s sputtering real estate market, as industry leaders, buyers and sellers wait for his calls on Brexit, stamp duty and other decisions that could upend the status quo.
Mr Johnson has said that the U.K. will withdraw from the European Union by Oct. 31, with or without a deal, though many suspect a final decision on Brexit could be delayed further.
After the EU referendum in 2016, political flux and uncertainty stalled the market, but a turnaround is underway, with a 6.1% increase in sales agreed upon registered between July 7 and Aug. 10 compared to the same time last year, particularly in the east and northeast of England. The pace of London’s real estate market is picking up speed as well, with homes selling faster in August than they did previously this year. And in the second quarter of 2019, the price of prime London properties went up 3.1% from the end of 2018.
Prime real estate prices are still down compared to 2014, though, and the number of prime homes on the market is 12.5% less than it was last year.
But it’s not just new leadership and the looming Brexit deadline responsible for this. Possible changes ahead for the stamp duty, limited housing supply at the high end, a decrease in the value of the pound, and a lack of recent development is also impacting sales in London.
Amid all the uncertainty, savvy overseas investors may find that now is a smart time to invest in prime London property. If Brexit does go forward as planned, London real estate experts predict, there will be an influx of foreign buyers looking for discounts. Their main challenge will be finding sellers ready to act, and meet them on a price point.
“The question a lot of people have is whether Boris is for real—is he actually going to do what he says?” said Becky Fatemi, director of Rokstone estate agency in London. “Once he does fulfill Brexit, there will be a ripple effect of the implications of his decision. But central London’s prime market is a world unto itself, and there are a lot more factors than the political situation.”
Changes made to the stamp duty in 2014 most heavily impacted buyers of expensive homes, increasing from 7% to 12% on properties sold for £1.5 million (US$1.82 million) and above. Now, Mr. Johnson is proposing a reduction in these taxes.
“The market peaked in 2014 before the stamp duty changes, and since then what we’ve seen is a gradual erosion of values rather than a steep fall,” said Lucian Cook, director of residential research for Savills in London. “A succession of factors has meant the market has remained price sensitive. Whether it was the stamp duty, various general elections, or the decision to leave the EU, the cumulative effect is that prices are on average around 19.4% off their peak.”
Further complicating matters is the value of the pound, which recently plummeted to its lowest levels in a decade. This can be a boon to foreign buyers, specifically Americans who now have the most favorable exchange rate in years.
“A lot of the dollar-based investors I’ve been dealing with have said it’s similar to 2008, when the Lehman [Brothers] crash happened. Smart people hedged their bets and invested in property,” said Guy Bradshaw, an agent with Sotheby’s International Realty in London.
“Across the U.K. housing market, there is clearly a degree of uncertainty as to what happens post-Brexit,” Mr. Cook said. “There’s little house price growth in all the main indices because of concern about what might happen to household finances.”
The number of homes sold in London in July increased 5.2% compared to last year, and the average sales price was up 1.3% compared to August 2018.
But the supply of prime properties is down 12.5% during the second quarter in London compared to last year, a result of limited new development and sellers taking a wait-and-see approach in the lead-up to the Brexit deadline.
But if Mr. Johnson reverses the stamp duty tax on properties priced above £1.5 million, as he has proposed, it could help to speed up the pace of the prime market.
“There’s discussion around what the government might do in the event of Brexit to support the economy and stimulate the housing market,” Mr. Cook said. “We’ve heard already from Boris Johnson that he will look again at the stamp duty, although it’s too early to say that’s a shoo-in. If that occurs, it will be a stimulus to that part of the market.”
Further depreciation in the pound would favor investors from overseas, but the problem lies in encouraging sellers to act.
“The biggest challenge for agents right now is getting a buyer and seller together on a price point,” Mr. Bradshaw said. “The market does favour buyers right now, and there are a lot of sellers who will sit on their hands and wait and see what happens. There’s still a little way to go in the lead-up to Oct. 31.”
“A lot of people have locked up properties, and buyers have become tenants,” Ms. Fatemi said. “There will be a real shortage of supply [of homes for sale], especially in the next three years. And if it’s a certainty that Brexit is happening, the pound may plummet more.”
Still, she added, central London enjoys some insulation from the ups and downs of the market.
“People will always come to London—it’s like New York that way. You’ll have volatility, but it’s not going to be affecting things as badly as people expect,” Ms. Fatemi said. “In our eight years as an agency, this is, ironically, our second-highest earning year.”
Opportunities for Foreign Buyers
The weakness of the pound has made the exchange rate especially favorable for Americans and other dollar-based buyers; earlier this year, overseas investors were already purchasing homes in the £10 million-plus range at a rate of three times more than they had before the Brexit vote.
“We’ve definitely seen an influx of buyers from the U.S., as well as expats who have their liquid credit in the dollar,” Mr. Bradshaw said. “If they’ve been renting here for two or three years, now would be an interesting time to buy.”
Many foreign investors are focusing not on super-prime properties, though, but on homes in the £500,000 to £3 million range, he said, because these tend to rent more easily, and demand for rentals in London remains strong.
Still, the depreciation of sterling has not attracted as many foreign buyers as it ordinarily might, as they also seem to be taking a wait-and-see approach.
“On the face of it, London looks like a pretty good value, and what we would have expected by now is overseas buyers coming back to the market,” Mr. Cook said. “But clearly, uncertainty around Brexit has made them reluctant this time. They want to see what it means for the London economy.”
Middle Eastern and Asian buyers remain very interested in the prime London market, meanwhile, as they hope to take advantage of the bottom of the market. Investors from the U.A.E., Singapore, Hong Kong, and the U.S. are the top foreign buyers seeking mortgages for UK properties now.
Nevertheless, savvy investors are keeping a close eye on the political situation, fluctuations in the pound, and Johnson’s proposed changes to the stamp duty.
“If sterling were to depreciate further, that would present a clear buying opportunity at that point,” Mr. Cook said.
Source: Mansion Global