Date Published 04 November 2016
The Big Picture
With hardly enough time to even blink since the Referendum, there is little chance of any analyst claiming that the post-Brexit market is anything other than uncertain, unclear and, at the very least, lacking in definition.
Reactions to Brexit
Following the Referendum, three things became clear:
There was an immediate reduction in prices by 5 – 10%
The devaluation of Sterling began attracting more overseas investors
Stamp Duty continues to be the biggest roadblock on the market
The immediate price reduction of 5% – 10% following the vote was triggered by buyers reducing their offers (mostly the very next morning) and committed sellers having to roll with the punches or lose their purchaser. These price reductions have now taken hold across Prime Central London, which had already seen values come down by as much as 20% over the previous 18 months or so.
Sterling's continuing devaluation is clearly offering advantages to buyers with money off-shore. It has dropped by 14% against the US Dollar and by 12.5% against the Euro – in real terms, this means an actual saving on a £5m purchase of £700,000 to an American or £625,000 to a European – this of course before they commence negotiations on any additional reductions they can get on the price. This has led to a noticeable increase in overseas investors buying in London. Given a combined saving of 20% – 25% in only four months, this represents excellent value in a market which has immensely strong foundations.
The combination of the recent Stamp Duty increases to 12% over £1.5m and an additional 3% for second home owners has acted as a double-whammy to already heavily geared purchasers. A buyer would now pay £513,750 in tax for a £5m purchase of a primary residence, and £633,750 if it is a second home. As the tax cannot be leveraged, the resulting increased liquidity requirements have had a dampening effect – quite apart from the emotional response of having to pay ‘that much in tax'.
Overall, trading volumes are considerably down by comparison to the heady days of Spring and Autumn 2014 – by approximately 50%.
So where does that leave the market today?
Domestic buyers and sellers both fall neatly into two camps. With sellers, we find they are either committed and will react to fluctuations in prices or they don't need to sell and have not adjusted their asking prices or expectations since the vote. Buyers are also similarly polarised – people who are fed up of ‘waiting to see' and want to move on with their lives and those who are expecting further falls in the market and are possibly more interested in renting until they can buy at more favourable terms.
And then of course there are the cross-overs – homeowners who want to move, but have to sell first in order to buy. Their main priority, as always, is not to step out of the market, and again, we have a two-tier selection – those who are committed to moving and understand that however much their sale is de-valued., they will benefit by the same percentage on their purchase, and owners who don't actually need to move and are more concerned with the price tumbling on their own home where they may have lived for several years of not decades. For this reason more than anything else, the rise of the off-market sale has become even more pronounced with an argument for demanding a slight premium for an exclusive property and for withholding it from the open market. Purchasers generally like off-market property – they are being given privileged information, exclusivity is assured and there is usually less pressure to perform as quickly as they would have to on the open market.
All the analysts agree that the Central London market will be tight with zero or even negative price growth for another 12 – 18 months, and some even extend that to two years. Most of them go on to predict that the market will grow again by 3% – 5% annually thereafter. Our opinion is that is it still much too early to make any meaningful predictions.
Article 50 has not yet been triggered and that will only be the beginning of a further period of uncertainty for another two years or more. Even with the recent ruling that Parliament must approve triggering Article 50, Theresa May is determined to hit her March deadline, but there may be further timing issues before clarity returns to the market
The US Presidential Election is on 8th November and most of the world is expressing concern over either a Clinton or a Trump White House.
There is the possibility of increased pressure on the EU to fragment if another major contributing economy has a referendum and votes to leave – it will be interesting to watch the next cycle of European elections.
Clearly the market is offering some fantastic opportunities to committed buyers who can find the right property, either off or on the market. If they can use off-shore funds, the FX rates offer significant savings and prices have already come down by 25% or more – effectively pricing in the increased Stamp Duty.
There are plenty of reasons for buyers to remain positive and for sellers to release stock into the market, especially if they are trading up – and more so when one considers how rock-solid the Central London Market's foundations are.