Brexit dealt a crippling blow to London’s property market. In the immediate aftermath of the June 2016 referendum that came out in favor of the United Kingdom’s departure from the European Union, the country’s economic growth slowed, the value of the British pound plummeted, residential property sales volumes slumped and real estate prices took a nosedive.
However, the troubled state of the London market offers a bounty of opportunities for savvy investors. As such, foreign investors are swooping in and snapping up choice properties amid the market downturn.
In this article, I will explore the issues currently ailing the London property market, and then address the reasons that despite its woes, the market is ripe for foreign investors.
The London property market: what went wrong?
London’s property market is currently grappling with economic struggles, a weakened currency, decreased demand, tumbling real estate prices and tax hikes.
Economic struggles and a weakened currency: the morning following the Brexit referendum, the FTSE 100 dropped by more than 8% and economists abruptly slashed their growth forecasts for 2017 amid rampant uncertainty.
In the months that have passed since, the British pound fell to a 31-year low. On 23 June, the day of the election, the exchange rate closed at $1.49 to the US dollar. The following day, that figure tumbled to about $1.37 to the dollar. In October, the rate scraped the low $1.20s.
Decreased demand and tumbling real estate prices: The Brexit decision also brought about a swift decline in real estate market activity. Amid looming uncertainty, investors postponed pending transactions, ushering in plummeting residential property prices.
One key issue here is that of supply and demand. Specifically, whereas demand recently outpaced supply by a great deal, supply and demand have recently leveled out, increasing pressure on developers to lower prices. Savills reported in the Autumn 2016 edition of its Spotlight Prime London Residential Markets report that between 2011 and 2015, sales surpassed construction completion rates by an average ratio of more than 2:1. As a result, as many as 60% of the properties currently being built have already been sold. Meanwhile, in 2016, sales volumes have fallen and construction completions rates have risen, reaching a ratio of about 1:1. In light of this, developers are facing pressure to lower prices.
In general, London real estate prices have fallen by some 15-25% since the Brexit referendum. Thus, those wishing to sell quickly, those working with properties that are particularly tough to sell and those who want to sell properties to wholesale buyers are facing pressure to offer massive discounts compared to pre-referendum prices – sometimes reaching 30%.
Tax hikes: In addition to the Brexit-related issues described above, property investors have demonstrated a wariness with respect to growing tax burdens in the United Kingdom. In December 2014, British authorities increased the maximum stamp duty connected with property transactions from 7% to 12%. In April 2016, an additional stamp duty of 3% was introduced with respect to houses and flats that do not serve as the purchaser’s primary place of residence.
Favorable conditions in disguise
Hidden among the above difficulties are a slew of opportunities, many of which are unique to London’s post-Brexit property market.
The pound’s sluggishness offers foreign investors the opportunity to get more bang for their buck than they could have just six months ago. For example, a GBP 1 million property would have cost a Russian investor 97 million rubles in May 2016; by late October, that figure had slid to some 76 million rubles, offering substantial savings in ruble terms. Likewise, Chinese investors would have paid 10 million yuan for a GBP 1 million property in June 2016. By October, that figure had fallen to some 8 million yuan. US dollar purchases have also reportedly increased in post-Brexit London.
Russian buyers in particular are eager for a bargain. Tranio.com received the same volume of London property requests from Russian buyers in the first nine months of 2016 as it had in the first nine months of 2014. The key difference, however, is that in 2014 the medial budget was EUR 1 million, while in 2016 it is EUR 577k. This is directly attributable to the ruble’s dramatic decline in value in recent years. Accordingly, Tranio.com expects Russian demand to increase amid the weakening of the British pound.
Likewise, the falling price tags exacerbated by the supply and demand issue described above do not represent a market decline in the traditional sense; rather they represent a market correction. According to data obtained from British financial institution Nationwide Building Society, between 2000 and 2015, the average price of new constructions in London surged 2.5-fold. The market was overheated. The current decline is temporary; Tranio.com forecasts that prices in central London may drop by an additional 5-15% in 2017-2018, but are likely to stabilize after that, and to begin to rise again in subsequent years.
As such, London’s post-Brexit market conditions are ideal at the moment for foreign buyers wishing to save big on foreign currency purchases, and then to sell their properties at a profit a few years down the line.
Meanwhile, those wary of tax hikes can take comfort in knowing that by properly structuring your purchase, you can significantly reduce your tax obligations. In particular, commercial property purchases – including purchases of offices and shops – carry a stamp tax ranging between 0% and 5%. The same low rates apply to the purchase of six or more residential properties in the context of one transaction.
The table below outlines sample stamp duties associated with the acquisition of various types of property worth GBP 5 mln (freehold):
Evergreen factors that make London an investor favorite despite Brexit
In addition to the current market conditions described above, a number of more enduring factors ensure that London will remain an investor favorite despite present difficulties.
First, even after exiting the European Union, London will remain a global financial center. The city’s banking sector is not expected to experience significant shrinkage as a result of Brexit. In January 2018, European regulations aimed at protecting London’s status as a financial capital will enter into force. Moreover, no other European city has a financial infrastructure that could rival London’s.
Second, London remains one of the world’s largest cities. Its population growth, which already totals 15 million, has outpaced both New York’s and Tokyo’s over the past decade. Even amid the anticipated decrease in immigration following the United Kingdom’s withdrawal from the European Union, demand is not expected to fall below supply.
Finally, London offers affordable loans. In August 2016, the Bank of England halved the prime lending rate from 0.5% to 0.25%. This carries numerous benefits. For example, affordable loans can always be relied upon to stimulate demand. Furthermore, for rental-property investors, decreased lending rates translate to increased profits. Finally, lower rates are alluring to first-time property investors who realize that they could earn more by purchasing real estate than they would by letting their savings gather dust in deposit accounts.
For all of these reasons, despite all appearances post-Brexit London could be the perfect location for your next property investment.
George Kachmazov is the founder and managing partner of Tranio.com. He is a respected real estate and investment expert, as well as a keynote speaker at many national and international property conferences. George regularly contributes to print and online media with insight on real estate trends and advice for first-time investors.