What will a new Mayor and a potential Brexit do to London’s Prime property market?

In the weeks leading up to the 2016 London Mayoral election and with the subsequent win, Sadiq Khan has attracted considerable media attention with his rigorous campaign to resolve the UK housing crisis. In his Manifesto, Mr Khan defines the UK housing crisis as one beset by a shortage of affordable homes, especially for individuals living in London. With proposals including building affordable homes on brownfield land with first preference to purchase can be given to native Londoners, this initiative may open new opportunities for large scale investors looking to expand to areas in outer London.

However the details of the new housing policies are yet to be refined and stiff opposition is expected from many of London’s private developers and agency bodies with regards to affordable housing quotas in new schemes and rent caps. With a campaign emphatically centered on affordability and availability, it is difficult to foresee notable implications for individuals seeking to purchase residential and commercial properties above the million pound bracket in Prime Central London.

With the new mayor now elected, the focus returns to whether Britain will remain in the European Union. With only four weeks remaining until UK residents make their decision, heated debates for and against a ‘Brexit’ have inescapably influenced the UK property industry. With many extreme scenarios and viewpoints being reiterated by the media and Westminster, it is important to focus on the tangible and plausible impacts on the London and UK property market.

Should a ‘Stay’ vote succeed, latent demand is likely to revert causing a busy market in the second half of the year, similar to that seen with the Scottish referendum – leading to a more competitive market in the latter half of 2016, which may harden yields in the commercial sector as confidence and investors return.

However should a ‘Leave’ vote prevail, it is the uncertainty in the following negotiations and the overriding market sentiment that will take precedence. The key negative impacts will be the likely short term loss of confidence or certainty in the market, potentially removing jobs, GDP & FDI from the economy and subsequently impacting the rental market. There is also the risk of potential decreases in asset values and a more apprehensive market than we are experiencing.

On the other hand, a Brexit depreciated sterling will be a boon for dollar denominated wealth, potentially mitigating some of the ‘market downturn’ during the negotiations period. Some more ambitious figures estimate a near 20% sterling depreciation should Britain leave the EU. Whatever the outcome, the weaker pound and currency arbitrage will enable foreign buyers to take advantage of the market, such as we’ve seen with recent SDLT increases. Furthermore the options made available to the government to reduce or increase regulation or transparency concerning foreign ownership of UK property will have a further impact on investment and sentiment in this scenario.

Either way, London’s virtue as a financial hub and gateway to Europe will remain, the language and top tier education, legal & political systems and renowned healthcare services all maintain the capital’s magnetism.”

Thus it is forecast that the forward emphasis will be on necessity purchases and income driven investments. Fortunately Taxand’s Total Tax Take (T3) research has reinforced that the UK remains one of the cheapest countries for residential and commercial property investors. An average total tax take of 9.35% on residential property rents puts the UK in third place behind Poland and Romania and well ahead of the likes of say, South Africa; which despite having the world’s best value per square meter {Knight Frank Wealth Report 2016}, conversely has the one of the world’s highest levels of rental taxation at 19.58% for commercial property rents and 24.17% for residential rents.

With the recent ONS House Price Index revealing the largest annual increase in UK Housing price inflation was in London at 13.0% (up from 9.3% in the year to February 2016) and with market leaders still forecasting a 3% rise in real London property prices despite Brexit fears, London property continues to exhibit its resilience and investor appeal.

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This post was written by Tim Jones