Prime London Properties Have Peaked

LONDON’S heady prime and new development residential property prices have peaked. Migration into London from the European Union and elsewhere and a general shortage of property indicate that the price graph, with cyclical fluctuations, will continue to slope upwards in the long term, analysts say.

In the meantime, however, anecdotal evidence from a variety of independent sources show that prices have begun to dip. Current high levels are generally too expensive relative to incomes of British residents. Demand from Asia, Russia, South Africa and Latin America has declined in recent weeks because their currencies have fallen sharply against the pound, local property markets are topping out and economies are slowing down.

Stamp Duty and other taxes deter demand

A major increase in stamp duty on property over £1 million (S$2.2 million) and a 28 per cent capital gains tax on purchases after April 2015 have dampened local and foreign sentiment and caused transactions to slide. A government move to phase out interest and some other expenses that reduce tax on rental income in 2016 and 2017, has also raised uncertainty for landlords.

In addition, an estimated 54,000 apartments are coming on stream at Nine Elms on the South Bank and other prime developments around London, says Charlie Ellingworth, director of Property Vision. The expectation is that high asking prices will not be achieved as sellers are beginning to encounter resistance from both foreign and local buyers.

Decline in both prices and volumes of global stock markets are also dampening expectations of investment bank bonuses which fund purchases of property in Canary Wharf and other popular financial sector areas. Finally, government regulators are trawling offshore transactions in a drive to terminate international money laundering and tax evasion that previously found its way to the London property market.

Hard data difficult to obtain, but anecdotal evidence indicate market top

“It is very difficult to obtain hard price and sales information, especially when market conditions become more challenging, but anecdotal reports indicate that there are direct and indirect discounts and incentives on newbuild properties,” said James Wyatt, director of Parthenia Valuation, an independent valuing and data firm.
Gross average rental yields are estimated at around 3 to 4 per cent, so that net yields, after taking into account expenses and voids (vacant periods) are invariably below 2 per cent, say analysts.

LonRes, a firm which monitors property volume and price data, reckons that in the second quarter of this year, transactions across prime London fell by 22.7 per cent on the same period last year and that prices on a pound per-square-foot basis are down 0.9 per cent. The period under review included worries ahead of the May general election but William Carrington, LonRes chairman, said that the stamp duty changes introduced at the end of 2014 are the main cause of the slide in transactions.

For properties priced at £1 million, the stamp duty is 4.4 per cent, rising to 6.3 per cent for apartments and houses of £1.5 million, to 7.7 per cent on £2 million houses, and 8.6 per cent or a whopping £214,000 on a house price of £2.5 million. At property values of over £4 million, stamp duty exceeds 10 per cent, or £400,000.
Compared with monthly London transactions of 120,000 in the years before the 2008/2009 crash, volumes are currently between 7,000 and 8,000, the UK Land registry states. A key reason is that the high stamp duty has created a logjam, estate agents say. Older generation residents are remaining in four to five-bedroom houses as they can’t find suitable homes to move to. There is thus a shortage of good quality houses in central and outer London, but since prices are high relative to earnings and banks require large mortgage deposits, cash buyers are still able to obtain discounts on purchases.

Outer London currently out performing prime expensive apartments

The August report of the UK Land Registry illustrates that cheaper outer London markets are outperforming prime areas. Kensington and Chelsea average prices rose by 2.1 per cent to £1.35 million in the 12 months ended July 2015; City of Westminster by 3.5 per cent to £995,000. But Camden, which includes pricey St John’s Wood and Hampstead, was virtually stagnant at 0.1 per cent to £806,000. Further out, prices of properties in Enfield and Harrow jumped by almost 14 per cent to around £350,000 to £400,000.
The London property market, however, has and continues to be uneven, so potential buyers have to take a long-term view.

China impact ambiguous

“The effect of China’s currency devaluation on the prime central London property market has been twofold,” according to Tom Bill, head of Knight Frank’s London Residential Research. “On the one hand, it has caused some buyers to postpone decision-making until there is a greater sense of certainty. On the other, there is evidence that Chinese buyers have stepped up their interest in ‘safe haven’ global property markets like London and are increasingly looking for homes in ‘golden postcode’ neighbourhoods like Mayfair.”
Nevertheless, annual average price growth is largely flat at 0.4 per cent when the newer prime central London markets of Islington, Riverside, City & Fringe and Southbank are removed, added Mr Bill.

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