It won’t surprise anyone to hear that it’s been “a challenging year” for the residential property sector in prime London, with the tax regime plus domestic and global uncertainty leading to tanking transactions numbers. Some new analysis of the latest batch of Land Registry data by London Central Portfolio confirms the picture, and highlights some of the key numbers in the PCL market in 2016.
- Rolling annual data for Prime Central London to Q3 2016 demonstrates broadly stable prices, with a 0.5% fall over the year and an increase of 0.5% in Q3.
- Annual transactions to Q3 2016 have fallen 24% with Q2 and Q3 showing falls of 58.1% and 49.7% respectively.
- There were 3,696 annual transactions, one of the lowest figures recorded. This is 42% below two years ago and similar to levels during the Global Financial Crisis (GFC)
- For some of the most expensive areas of PCL, a fall of 7% in prices and 6.5% in rents has been projected for 2016
- In contrast, PCL’s units under £1m have seen a 4.3% increase in value vs last year and rental increases at renewal of 2.8%, according to LCP
- Both Outer London and Inner London may be seeing the impact of the new taxes and Brexit with first dip in prices after a period of sustained growth
2016 proved a challenging year for the Prime Central London property market. The past 12 months not only witnessed a marked slowdown in sales activity as stamp duty changes dramatically affected sentiment, but uncertainty has been a recurring theme, both before and following the UK’s Brexit vote.
With the headwinds it has been encountering, this year has seen the PCL market fragment with different dynamics driving the performance of property at the lower end and the luxury end. This has created a watershed at £1m, above which tax is having the most significant effect on investor decisions.
As a whole, prices have remained resilient. According to new Q3 statistics released by HM Land Registry and analysed by London Central Portfolio, they have remained broadly static this year, reflecting a fall of just 0.5% to £1,590,470 on a rolling annual basis. A 0.5% increase in prices, however, has been recorded in the last quarter.
Significantly more dramatic has been the 24% fall in transactions vs the previous year and 58.1% and 50% falls for Q2 and Q3 respectively. This far outweighs the 29% increase in sales in Q1 2016, due the introduction of the Additional Rate Stamp Duty (ARSD) on 1st April.
The number of transactions for the last year stand at 3,696, one of the lowest annual figures since Land Registry began recording transactions and equivalent to the depth of the Global Financial Crisis (GFC). This is 42% lower than two years ago when the graduated stamp duty regime came in.
The Luxury End
Three successive stamp duty increases since 2012, resulting in a rise from 5% to 15% for some purchases, alongside other aggressive tax hits, has seen the luxury end of the market suffer a discernible price correction with marked falls in sales activity.
Whilst statistics are hard to come by for this sector, all market information points to a softening in prices. Knight Frank revised their forecast downwards for 2016 with a 7% fall for Prime Central London (West). Other high-end estate agents have reported similar or greater falls. The market has also seen a suppression of rents in this area according to Knight Frank, who are forecasting a 6.5% fall.
Naomi Heaton, CEO of LCP: “Following an influx of discretionary capital in Q1 as buyers sought to beat the ARSD deadline, a notable price correction has taken place for the top end of the market. Unlike the lower end, this sector has been hard hit by the succession of new taxes. Historically, it witnesses far more volatility in periods of political and economic turmoil. While the long term outlook remains compelling as a global destination with exclusive and limited stock, it may take some years to correct with prices rebasing themselves to take account of the additional buy-in costs.”
The Market Under £1m
Despite the gloomy picture for the luxury end of the market and more subdued reports for PCL as a whole, some sectors have shown signs of positive growth in 2016.
LCP target properties in PCL’s Private Rented Sector comprising units under £1m. According to independent RICS accredited valuations, these have seen a 4.3% increase in value over last year.
This is corroborated by the Land Registry HPI data for October 2016. Annual price growth for the City of Westminster, where prices average £937,473, has been 3.8%. In contrast, Kensington and Chelsea, where prices average over £1m, has seen a fall of 2.6%.
LCP’s rental portfolio has also considerably outperformed the higher-end sector, with rental renewals increasing by 2.8% and re-lets falling by just 1.7%.
Heaton: “Whilst the top end of the market is more vulnerable to the recent succession of tax hits, the tax increases have been far less painful at the lower end. In addition, property is commercially rented and if buyers are unable to achieve their price expectations, they will generally hold onto their asset. As an entry price market, it is also more accessible, remaining particularly attractive to international investors taking advantage of current exchange rate benefits resulting from Brexit.”
The Year To Come…
Heaton: “2016 has been a rollercoaster year for PCL residential, but signs of stabilisation at the lower value end of the market are good news. LCP would anticipate that after a year of constrained activity and increased uncertainty both in the USA and elsewhere in the EU, investors will actively re-enter the market. Current dynamics echo the recovery following the GFC when low interest rates, weak sterling and a softer market encouraged investors back in, resulting in a subsequent rally in prices. LCP expects steady but muted price growth for 2017.”
Adding to existing tax pressures at the luxury end of the market, the scope of Inheritance Tax is being widened to look through offshore structures and capture underlying UK residential property assets. This is likely to further impact sentiment where it has been usual for buyers to use such structures.
Heaton: “For those planning to acquire higher value property in corporate structures, 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”.
The wider impact
The new stamp duty rates and general uncertainty of Brexit in the domestic economy may also be starting to impact the wider London market. According to the Land Registry October HPI figures, Outer London saw its first monthly fall in prices (-0.2%) in almost four years and Inner London, its first fall in six months (-0.9%).