2014 has been an interesting and uncertain year on many fronts and as we approach 2015, next year’s outlook looks equally as ambiguous. There are numerous forecasts and outlooks of what the coming year might entail, yet until various events unfold, no one can succinctly say what the outcomes of the coming elections and changes in legislation will be. This is especially relevant to the field of real estate.
The past year has seen a real collision between UK politics, the world of property, in particular prime London, and a national legislative shake up. With so many possibilities and indecisions on what might happen, many outlooks seem only to reinforce the current market sentiment of sitting quietly and waiting to see what happens. However, despite the New Year’s vague prospects, there are some things we can be certain of and can accommodate for accordingly.
As put by Savills in their Residential Property Focus 2014, ‘the fundamental drivers of supply and demand in the housing market go way beyond 5 year political cycles and are rooted in long run socio-economic and demographic trends coupled with very deep rooted land supply issues.’ So despite the conflicting and concerning political rhetoric, largely concerning the possible looming mansion tax, it is relatively certain that the prime London market will one, continue to provide attractive investment opportunities and two, show signs of power shifting from sellers to buyers.
To elaborate, there continues to be numerous ‘villages’ of value and demand for privately rented property is consistently high across the capital meaning opportunities for investors remain, given the right knowledge and professional support, regardless of politics and market sentiments. Various sources, including Savills, estimate that nearly a quarter of households in the UK will be privately rented by 2019 and with tax breaks for buy-to-let investors, it is evident that for those willing to enter the market, respectable yields can be achieved from such investments. Similarly, the inflated asking prices of the past two years are losing traction as the market quietens, also due to the time of year and in anticipation of next year’s changes, the likes of which may see prices further favour those seeking better valued property.
Since the financial crash of 2007, average London house prices have increased by nearly 30% (Jun07-Jun14). The average price of property in the capital is £460,521, in comparison with the average for England and Wales of £177,299, according to the UK Land Registry’s most recent Housing Price Index report. Comparatively, Rightmove’s trend data puts average house prices for Chelsea (SW10) at £801,465 in July ’07, growing significantly to £2,177,287 in July ’14 (+58% increase). Aside from the spring time price spike of 2012, 2014 has seen some of the highest levels of price growth. The overall increase in London was 18.4% this year, the borough of Lambeth reaching the highest levels at 28.6%. Yet current data and market trends show signs of the vast levels of growth receding, exhibiting signs that the inflated market is starting to cool.
Property in close proximity of Hyde Park is generally in highest demand and has historically reached the highest premiums. Knight Frank research has shown properties within 50m of the south side of the park reach a premium of 155% whilst the north side (W2), reaches 38%. This vast disparagement highlights the impact of postcode perception on pricing and the serious underlying potential of properties based on the north side of the park.
The Crown Mayfair team, also supported by real estate industry leaders, has shown appreciation of W2 and advocated the capital growth prospects for areas including the Paddington basin, Queensway and Westbourne Grove. With prices growing 27% less than the likes of Kensington and Marylebone, with 13 high end schemes appearing and with the planned Crossrail links adding significant uplift value, the postcode is of particular interest and contained our second highest volume of exchanges this year, after Chelsea SW10.
Yet in spite of attractive opportunities, the residential market outlook is actually rather quiet, while the rest of the landscape is dominated by the prospect of increased taxation of high value homes (SDLT, ATED). Coinciding with HMRC’s menagerie of new tax bands, amendments to Capital gains affecting non-doms and anti-tax avoidance measures, the financial landscape is undeniably uncertain. The Chancellors Autumn statement will be released on the 3rd December and next year’s finance bill on the 10th, so the proposed changes to Principal Private Residence relief (PPR), changes to inheritance tax (IHT) legislation and the further announcements on Capital Gains should be clarified. However the likelihood of the infamous ‘mansion tax’ actually coming into effect next spring remains somewhat slim. The market consensus is that an overhaul of the current council tax system is much more likely.
Either way, property prices are forecast to dip in the wake of the elections next year, rebounding and accommodating tax changes by 2017. Properties above the £7.5 million mark are likely to see some of the more significant initial dips in price before recovering, while at the other end of the spectrum, properties around the £1 million mark are the most susceptible to possible changes in SDLT, interest rates and labour’s mansion tax proposals. Research by industry leaders support these statements. So, from an investment point of view, although various taxes are set to increase, the possibility of offsetting these costs though smart and timely investments is very much a reality.
Once the furore of the 2015 elections has quietened down, the London market is set to resume business as usual, in a climate predicted to be more beneficial to buyers. Yet the extent to which the proposed changes will affect the UK property market as a whole, especially in relation to overseas investment and finance structuring, remains to be seen. Only time will tell. until then, seasons tidings from the Crown Mayfair team.
With spring well and truly sprung and the UK general elections around the corner, political rhetoric and market tensions are at their peak. As past experiences go, elections tend to breed an air of uncertainty and risk, yet they equally offer opportunities for investors to make their move while the ambiguity clouds the market and dampens intentions. In spite of the political upheaval, the London property market maintains its buoyancy, the consistent levels of demand underlining the election furore above.
Q1 2015 reports show a 26.7% decline in transactions in compared to this time last year, however rental values increased by 7.4% compared in the same period. It appears that the substantial levels of price inflation in the past three years, seem to have peaked, plateaued and are now in many, but not all sectors, in decline. With property now at the forefront of many political agendas, much of the super prime and high value property has ended up in the limelight and consequently in the taxman’s sights.
At the top end of the spectrum, property transactions in the £5-10 million bracket are down by 35.3% compared to Q1 2014. This can be attributed to the changes in SDLT (Stamp Duty Land Tax) having the greatest impact on this end of the market, although the rush to exchange before the infamous midnight deadline last year will have skewed data slightly.
Either way, as transactions and demand dampens, prices too have begun to fall and the effects are filtering down through the price brackets. The £1-2 million region remains the most resilient to sentimental and supply changes (transactions down by 8.5% compared to Q1 2014), however situations are far more volatile the closer you get to the fringes of the brackets and the consequential tax implications. However, this has all led to an improved and improving environment for buyers and as certain areas of the capital and types of stock remain less affected by policies and pricing, opportunities verily remain.
Our own books have even seen a marked increase in the number of buy to let investors wishing to capitalise on secure long term property investments. Meanwhile the various owner occupiers we are presently engaged with have been largely unfazed by political stirrings, purchasing out of want as well as necessity and have structured and sought accordingly.
The decisions made in the coming week concerning the new government and the policies they implement will of course be vital to determining investor sentiment and personal wealth structuring, especially for non-doms should Labour/SNP snatch power. However it remains to be seen that despite the ballot box hysteria and political battering that London property has seen recently, demand for accommodation is legendarily resilient. With the array of schemes across the capital and with rental demand rising unceasingly, home owners and buy to let investors alike should continue to be able to take advantage of what the city and the suburbs have to offer.
(Figures courtesy of Lonres residential review 2015)
Crown Mayfair Market Review – Q4 2015
With Q4 underway and Christmas adverts all around, it signals the drawing to a close of what has been an interesting year for UK property. From an analyst’s perspective, this time of year is a bonus in that it provides enough succinct data to analysis the past and make more reliable judgements going forward, something that the industry itself has had a somewhat tricky time with throughout 2015.
The elections, changes to legislation and changes to UK property taxation have been at the forefront of agendas all year thus far and remain on the lips of many you still meet. However in this day and age so easily affected by speculation and confidence, it pays to pay attention to the ‘real story’ or in a better sense, what is really happening on the ground. With the media, public and political furores concerning property and tax abating, one can truly observe the resilience and versatility of the London market. Where large bounces or dips are heralded, real market forces take sway and silence much of the speculation. Where certain spheres in the market diminish, others bloom and this has been evident within the super prime and the sub £1million markets respectively.
Pricing since the 2007/8 crash has seen many values in the capital soar and in areas of high prestige or demand, pricing exceed the ‘real’ market value and remain steadfast in the inflated expectations. Combined with the increase in SDLT and ATED, it is clear to see why transactions and prices have fallen in the super prime market over the past year. The middle of the market (circa £5m) has also been affected rather strongly with the increased transaction costs and proportionally higher impact on buyers and vendors.
It must be noted that what many vendors might perceive to be a negative, much of the market views the ‘normalisation’ of prices occurring within the capital as a positive factor, the amendments to taxation and legalisation acting as a catalyst for an already changing marketplace. It is however the sub £2million market that has seen positive levels of growth and truly increased demand and this is for a number of reasons to be touched upon in due course.
So at the other end of the property spectrum, as the post credit crunch foray into ultra-high value property retreats, a new wave of investment has been seen across the capital, especially in the circa £500,000 region.
As the aforementioned changes to taxation increase the costs of purchasing higher value property, many have instead turned to lower ticket, higher yielding opportunities and have chosen to look further afield than the golden triangle of Prime Central and surrounding neighbourhoods. In spite of changing legislation affecting BTL landlords; with attractive financing structures, strong growth prospects and at the end of the day, lower ticket costs, it is evident to see why agents all across the board have reported a marked increase in sub £1 million sector activity.
Thus combining the investment waves and the ripple effects from the inflated prime central pricing, it is clear to see why the ‘Prime Central London’ catchment area itself has expanded to include so many previously considered ‘periphery’ locations.
Areas such as;
:have all seen a large amount of investment into new schemes and improved infrastructure. Pricing in these regions is more achievable or profitable for many and capital growth prospects for these areas are strong.
This is especially true for the latter E14/E16 with the Crossrail and Asian Business Park providing the uplifting factors to weather any potential dips in the market or possible oversupply, the likes of which have been experienced elsewhere in the capital.
Looking forward, key market drivers include;
Data credits – JLL, Savills, Knight Frank, Lonres.
With the new year there always comes a renewed sense of purpose and positivity, which seems rather essential given the battering global stock markets have taken and in light of the increased taxation of the UK property market.
And so it is always positive to take note of the capital’s resilience in providing opportunities and continued long term price growth despite the occurrences elsewhere in the world and closer to home in Westminster.
Savills latest news update reported that London property alone now accounts for over a quarter of the UK’s total property value. (£1.612trn of a total £6.17trn)
5 Year Prime Central Price Growth Forecasts – 2016-2020
With last year’s mortgage regulation and various increases in SDLT cooling the market, price growth has continued but at more realistic levels. However many will support that this benefit is still restricted to the more affluent buyers entering the market.
At lower ends of the spectrum, tighter lending controls and regressive taxation have impacted on the ability for buyers further down to trade up or even get on the ladder.
In turn, this has facilitated the pricing ripples out of Prime central London and continue to increase the attraction of surrounding, ‘better value’ boroughs.
This too has further reinforced the strong levels of demand in the private rented sector. The number of privately rented homes in the UK has risen 28.3% since 2010, thus encouraging both investors and the government’s imposition of new tax in this market.
Property Investment Outlook
In spite of the various increases to our client’s associated costs, Crown Mayfair has received strong levels of client interest in the latter 6 months of 2015 and over the New year. Including Owner occupiers and Investors, our books have received very positive levels of activity as clients seek to prioritise purchases; in aims of either beating tax deadlines, investing their funds into the safe haven of UK property or having reached a time where they are able to focus their full attention on the bricks and mortar of the capital.
Data Credits: Knight Frank, Savills, CBRE
Crown Mayfair Market Review – Q1 – Spring Budget
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 ‘2nd’ 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.
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.