Brexit Resolution Nears, But an Uncertain Real Estate Future for London Remains

By Laurel Ives | Mansion Global

Rending of Center Point, London COURTESY OF ALMACANTAR

Despite an uneasy climate, buyers may have a large advantage due to pent-up demand and bargains on the market

What does the future hold for the once-booming London prime real estate market, which has seen steep falls in value since the U.K.’s seismic vote in 2016 to leave the European Union?

Prices are now 18.4% lower than their 2014 high, according to international real estate adviser Savills, although the decline did start before the Brexit vote, with a series of new taxes imposed by the government to dampen double-digit price increases.

Meanwhile, a UBS report Wednesday found that 39% of current home listings in London have gotten a price cut. A December Halifax report had a less gloomy outlook, saying house prices are expected to stabilize over the next 12 months, logging increases of between 2% and 4%.

The vote to leave the EU has accelerated price falls, and many luxury developments in the capital are now lying half empty—dubbed "ghost towers" by local media.

At one such development, the iconic, revamped 1960s skyscraper Centre Point, developers announced in October they’re giving up on trying to formally sell the remaining apartments after too many "detached from reality" lowball offers. Half of the tower’s 82 apartments, which range from £1.8 million (US$2.27 million) to £55 million for a penthouse, now stand empty after sales were halted.

Not surprisingly realtors are also suffering. In London, the branded green cars of upmarket estate agents Foxtons were once ubiquitous and became a symbol of booming times. They are rarely spotted these days, and recently the realtors announced that six branches will close, including its Park Lane flagship.

The downturn is the fallout from political uncertainty. The deal the U.K. government has cut with the EU is looking unlikely to pass through parliament, and there is no clear consensus around an alternative. Meanwhile, the date on which the U.K. is currently committed to leave the EU, March 29, draws ever closer, with no clear plan in sight. Many are concerned the U.K. could crash out of the world’s biggest trading block with no deal at all.

It’s hardly surprising that many buyers and sellers are choosing to sit tight, rather than risk further price falls or accept deep discounts.

"Uncertainty is about the only thing we can be certain about over the next two years," said Henry Pryor, a former realtor with Savills who is now a buying agent and market commentator.

And yet. Despite the lack of a Brexit roadmap, some property experts are seeing the potential, but cautiously, for a real estate bounce once greater clarity about the future relationship with the EU finally arrives.

They expect this bounce to be driven by international buyers taking advantage of the fall in sterling. Since 2016, the pound has depreciated 12% against the euro and 5% against the U.S. dollar, and with few buyers around, there are some serious discounts to be had for a brave investor.

"There is a significant weight of capital poised to make its move," said Naomi Heaton, CEO of the London Central Portfolio (LCP), in a December statement. LCP tracks sales and transactions of real estate in the U.K. "There is clear evidence that more experienced investors are returning to the market to capitalize on extremely discounted prices and sterling depreciation."

Optimism like Ms. Heaton’s comes despite statistics by London Central Portfolio that found that year-to-year through November, there was a 14.7% drop in annual transactions, to 3,703.

Meanwhile, Savills recently published its updated five-year forecast, in which it foresees a Brexit "pause," followed by a bounce in prices of 6% in 2021, and then a rise by a total of 12.4% over the full 2019-23 period.

"The feedback we’re getting from our agents is that London is beginning to look like good value because of the fall in sterling," explained Lucian Cook, Savills head of residential research. "Historically, when that’s been the case, we’ve seen strong recoveries. However we’ve tempered our forecast to reflect the fact that the tax environment is not quite as welcoming as it was."

The U.K. government has imposed greater burdens on stamp duty and inheritance taxes, and has promised to implement a new surcharge tax of between 1% and 3% on overseas buyers. However, Mr. Cook points out that office rentals are holding up well, and the fundamental appeal of London’s language and culture to buyers remains the same. The city also holds up well against the competition, he added.

"New York’s prime real estate market is harder to access for overseas buyers, and Paris and Frankfurt don’t have such established prime markets," Mr. Cook said.

Marcus Dixon, head of research at data company LonRes, which tracks London sales and lettings, thinks the market could also benefit from significant pent-up demand.

"A lot of people are waiting to move and buy. They’ve got the money in the bank, and once there is greater certainty, they will come back into the market," he said. People tend to flock to London as a relatively safe place to park their money, and I don’t think that will fundamentally change."

Data from luxury estate agents Knight Frank seems to reflect that pent-up demand Mr. Dixon mentioned.

Its figures show there was a 12.5% increase in the number of new prospective buyers in the third quarter of 2018 compared to the same quarter of 2017.

Mr. Pryor believes Brexit is being used as a catch-all scapegoat for a cyclical market downturn that would have occurred anyway, and was exacerbated by the tax rises. He also notes that his wealthy clients are as concerned about the prospect of the tax rises as they are about Brexit.

"Yet despite the increased tax burden, there are discounts to be had,"  Mr. Pryor said. "A prime property in Mayfair that was on the market for £30 million has just sold for £15 million. I’ve just bought an apartment for a client that was on the market for £855,000 and we paid £700,000. … If you want to buy a house, there has never been a better time."