How can London’s prime property market pull itself out of its tailspin?

Simon Dawson | Bloomberg | Getty Images

The higher you climb, the harder you fall. And so it was for prime central London (PCL) property prices this year.

Properties valued at above £5 million ($6.2 million) saw average selling prices per square foot fall 20 percent compared to 2014, according to data from LonRes, which aggregates statistics from its network of over 6,000 London industry professionals.

However, the lower the price, the lower the fall: PCL properties valued between £2 million and £5 million realized on average 9 percent less per square foot than in 2014 and those below £2 million just 4 percent less.

On top of this, the hand of buyers was strengthened in 2016 with an average 10 percent negotiated off initial asking prices versus just 4 percent in 2013.

But the year's defining characteristic was the woefully low number of transactions executed following the introduction of stamp duty on the purchase of additional properties on April 1. This was on top of the substantial hike in the same tax in December 2014 which had targeted high-end properties.

The number of transactions this year has slumped by nearly a quarter versus 2015, although the pace has picked up slightly in recent months, according to LonRes.

Political uncertainty

Knight Frank 2016.

Looking ahead to 2017, the introduction of further policy measures could well rattle the market as tax relief on mortgage interest is gradually whittled down to nothing by 2020 and incoming changes to inheritance tax kick in to include previously exempt foreign-domiciled owners purchasing within a corporate structure.

"This will be another tax burden which could postpone purchasing decisions or lead to a decision to divest. This will undoubtedly slow the recovery of the top-end of the market until buyers get used to the new normal," warned London Central Portfolio (LCP) chief executive, Naomi Heaton.

Indeed, U.K. government tinkering to the tax regime makes it especially difficult to put forward assertive forecasts for next year, not least given that the launch of its long-awaited Housing White Paper has now been delayed until January 2017.

"It has to be said that predictions are especially treacherous when there are too many moving parts. In truth, most of it is like throwing darts at a dartboard – from a merry-go-round whilst blindfolded. A prediction made now may be invalid by March as the political landscape takes shape," contended Michelle Ricci, co-founder of property research and analytics firm, Propcision.

Nonetheless, Ricci provided her best estimate on the basis of her data-crunching insights: "We expect continued downward economic trends in London, continued uncertainty and a substantially reduced investor appetite for UK exposure via PCL conduits."

"However, we are not heading for a crash based on that data. Just a slow, depressed market until a stimulus is found," she concluded.

Headwinds to growth

A similarly downbeat tone was also noted in buying agent Henry Pryor's assessment.

"PCL will continue to challenge with transaction volumes slipping further in 2017 and prices following. 2017 will be a buyers' year and I expect them to feast on the opportunities that arise," said Pryor.

"I see house prices falling by a further 5 percent," he estimated.

However, Lucian Cook, head of Savills U.K. residential research said he saw values fluctuating around zero growth over the next two years as Brexit negotiations play out, before returning to capital growth in line with the long-term trend in 2019. His outlook for five-year price growth for PCL is for it to still reach a buoyant 21 percent.

"This assumes that sellers have adjusted their price expectations to accommodate much higher stamp duty rates payable by buyers that were introduced in December 2014. While the market will remain susceptible to fluctuations in buyer sentiment, there is nothing to suggest that the impact of the vote to leave the EU will echo that of the global financial crisis," Cook qualified.

Late 2016 recovery

People, one with a Union Jack umbrella, walk across Westminster Bridge towards the Houses of Parliament on a wet, September afternoon in London.
Jeff Overs | BBC News & Current Affairs | Getty Images
People, one with a Union Jack umbrella, walk across Westminster Bridge towards the Houses of Parliament on a wet, September afternoon in London.

Tom Bill, head of London residential research at Knight Frank says that transaction levels have picked up since the summer as sellers lower asking prices to reflect higher transaction costs with Brexit in some cases being the catalyst for overdue price reductions.

"Political uncertainty is likely to persist into 2017 but the one lesson that 2016 has underlined is that buyers will act when they believe the price is right, in many cases irrespective of wider issues like Brexit," said Bill.

Fionnuala Earley, chief economist at Hamptons International highlighted that the extra pricing pain suffered by PCL compared to the rest of the market in 2016 was also related to demand slowing as expectations of future capital gains are moderated after several years of double-digit price growth.

Earley also pointed to new supply beginning to come online in the luxury markets and bearing down on price growth.

FX effects

Frédéric Soreau | Getty Images

However, some see opportunity in the market -- particularly when it comes to foreign buyers, given sterling is down over 16 percent versus the U.S. dollar and nearly 13 percent against the Euro so far this year.

Hamptons' Earley agrees foreign buyers' appetite will support the market in 2017.

"Currency moves offer a large discount as compensation for any perceived extra risk. London, after all, remains a desirable and wealthy global city. And after two years of falling prices and stronger negotiation we should expect to see prices in this sector of the market now begin to flatten out rather than continue to fall," she predicted.

Yet although Adam Challis, head of residential research at JLL, says that this has so far not been enough to entice international buyers back in significant numbers, his team expects prices to stabilize in 2017, following an 18-month period of weakness.

"The prospect of instability in Continental Europe is expected to improve relative appetite for London residential, alongside support from a U.K. economy that is defying gloomier forecasts," Challis explained.

Super prime to save the day?

Sensing potential, Anthony Lassman, co-founder of Nota Bene Global, is returning to his property industry roots as he expands his luxury lifestyle management company to offer residential buying services to his upmarket client base.

According to Lassman, buyers will still be active but more discerning with regards to the quality of products sought and the level of expertise offered.

"Rather like the art market anything super special and super prime will attract a good price provided it was not ridiculously priced initially and is carefully marketed," he said.

"Draws will be features such as a house with a special garden, a particularly wide lateral apartment or a property in a road where few come up for sale," Lassman highlighted.

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