Crown Mayfair Market Review – Q1 2016 – Spring Budget

Crown Mayfair Market Review – Q1 – Spring Budget

Overview

Although the London property market may not offer the same scale of opportunities seen in recent ‘golden’ years, Prime Central London’s status as a safe-haven remains and very few locations in the world offer greater long term financial security. With the Spring Budget containing a few negative impacts for the UK residential property industry, the market itself remains relatively flat; price adjustments still coming into effect and the Brexit decisions scheduled for June causing many to wait with baited breath.

Market consensus is showing that the stubborn price expectation gap between vendors and buyers is narrowing further, reinforced by tax deadlines and new rate impositions. In a market now receiving more quality stock, an increased number of motivated but discerning buyers and an environment rather less favourable for over ambitious vendors, asking price reductions are becoming more prevalent. We, along with much of the industry, expect to see asking prices reaching more achievable levels by the start of 2017. As the tax adjustments become accommodated for, there is an expected increase in opportunistic buyers to a market that will have essentially been flat for two years. With many high end developments completing and competing around similar times, respectable discounts are being achieved in the new build sector, reinforced by the stronger purchasing power of the dollar.

Overseas Investment in London

Core overseas markets have been affected by various domestic issues including commodity price fluctuations, taxation and exchange controls, which in turn has affected capital outflows into overseas assets. The strength of the pound against other major currencies has also been one of many contributing factors to the capital’s market slowdown and has played a part in the emerging disparity between the new homes and re-sale markets.

The payment structures of new build properties have helped mitigate the exchange impacts of the strong pound, the lower, staggered financial commitments allowing for currency market corrections and more attractive structuring. In turn, this has highlighted a disparagement between investment into new build and existing property where such payment structures aren’t in place. Given the inflated pricing of existing stock due to lower supply levels, parts of the re-sell market have been stymied by unrealistic pricing, with only those specifically looking for period stock choosing this route over new builds.

Prime and Super Prime Markets

The imposition of new Stamp Duty rates as well as recent April deadlines and ATED increases have impacted throughout London’s various property markets. However the greatest impacts have been felt in the £2m-£5m+ and £10m+ super prime brackets. With associated costs rising significantly with the introduction of the additional 3% SDLT for ‘2^nd’ homes, many buyers have been dissuaded from rushing into purchases, even more so in the £10m+ bracket. Knight Frank reported super prime sales fell by over a third in 2015. Conversely we have personally seen the super prime bracket maintain buoyancy, unlike the £2m-£5m bracket where interest and transactions have fallen significantly.

We have also observed the extent of distorted valuations in the super prime market. Vanity pricing along with hefty development margins and sales with planning permissions have resulted in many properties bearing considerably top heavy asking prices. In the past quarter, we have encountered numerous cases where extensive planning permissions have been granted and this in turn has been factored into sale prices well above market value; with the works themselves either still to be undertaken or worse, unfinished.

Consequently, many of these properties have remained on the market for some time, buyers less inclined to pay inflated premiums where more often than not, the permissions aren’t in line with their own personal wants and needs. However as seen elsewhere, reinforced by increased associated costs, negotiations have started to favour buyers, with vendors more amicable to competitive offers more in line with current market conditions.

Commercial

With residential property being the target for many of the government’s recent tax amendments, interest in commercial property  from private clients has risen significantly; the potential for high yields and tax reliefs luring an increasing number of investors. In 2015 alone, UK student accommodation received £5bn of investment, up from £1bn in 2011, highlighting appetite for alternative real estate investments. Prime London retail and office are also receiving strong rental and capital growth forecasts. According to the 2016 Wealth Report, 52% of those surveyed agreed that lack of knowledge was the key barrier to private commercial investment, highlighting the increased complexity of such purchases.

The reform of stamp duty on commercial properties has also come into effect meaning buyers will now pay 0% on the first £150,000, 2% on the next £100,000 and 5% on £250,000 and above. This reform was implemented to improve conditions for small business owners and largely concerns commercial real estate worth up to £1.05 million. In practice however commercial acquisitions are generally much larger, a £10,000,000 commercial purchase will incur SDLT of £489,500, whereas the residential liability would be in excess of £1,100,000.

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This post was written by Tim Jones