July 2016

Brexit and Beyond

Any London property investor who hoped that last week’s referendum would finally dispel years of uncertainty about the UK’s relationship with the EU will have been bitterly disappointed. The shock result – which saw the country vote 52% to 48% in favour of leaving the EU – has instead unleashed turmoil on the political class, on the markets and on the future of the United Kingdom itself.

While the near-term impacts are beyond debate – sterling slumping to a 31-year low against the dollar, the FTSE-250 in its worse sell-off since the 1987 crash – there is enormous disagreement about the longer-term implications for the UK economy and, by extension, the London property market.

The campaign was one of extremes. On one side the Remain campaigners, and the vast majority of economists, warned that restricted access to Europe’s markets would leave the UK permanently poorer. London’s financial services are particularly vulnerable, they feared and at risk of an exodus of bankers to Paris and Frankfurt. A more insular, closed Britain would be a less attractive destination for the rich, and would see less overseas investment.

The Leave side, by contrast, dismissed these fears as scaremongering. They argued that, unshackled from the sclerotic EU, the UK would regain its place in the world. They expect the EU will recognise its own self-interest in retaining strong trading links with the UK, and London will continue to be one of the world’s pre-eminent financial centres, not to mention of continuing cultural and educational appeal to the global rich.

The reality is likely to lie somewhere between these two extremes, however in the immediate  aftermath the only thing we can be sure of is that uncertainty is set to drag on for months, as the Conservative party chooses a new leader, a new relationship is negotiated between London and Brussels, and – quite possibly – another referendum or General Election is held to ratify whatever deal is struck.

Super prime

We expect this part of the market to be the least negatively affected by the outcome of the referendum. Indeed, the collapse of sterling means that dollar buyers are – as of June 27 – factoring in a 12.5% increase in their purchasing power since before the poll.

For the global elite buying properties at £15-20m or above, purchases tend to be about lifestyle choices rather than business decisions, or are to diversify extremely large portfolios. Indeed, we are still seeing transactions continue; Brexit did not feature in conversations with clients in this part of the market before the referendum, and it is unlikely to be much of a factor now it is underway.

Prime

We expect the section of the market dominated by domestic buyers and those working in the financial services sector – predominantly £2-5m, but also up to the £12-15m range – to potentially face some pressure linked to Brexit concerns. We do not expect the wholesale flight of financial services firms away from London, but in the event that they lose their “passporting” rights – their ability to sell financial services across the EU, if the UK does leave, this could trigger the departure of some financial services capacity to Dublin or the continent.

However, even relatively low numbers of homeowners leaving areas such as South Kensington and Notting Hill – where Europeans in particular, tend to be concentrated – and Canary Wharf, a market heavily reliant on corporate tenants and owner occupiers working in financial services, could have a significant effect on local markets over the next couple of years.

New-build outer prime

Already in the doldrums before the referendum vote, it’s the new build outer prime market that is likely to suffer most from continuing uncertainty. The stock market has already heavily bid down builders linked to this part of the market, which is suffering from significant oversupply and the disappearance of the foreign investors who had supported it in recent years.

Areas such as Nine Elms in Vauxhall and Earls Court in West London are particularly vulnerable due to oversupply of expensive properties aimed at the overseas investor. However, there are a handful of stand-out developments – such as Television Centre – that we believe are likely to continue to prove popular, and there will certainly be bargains to be had, particularly on the secondary market. Buyers need to be cautious, however, and ensure they understand the nuances of the local market.

Sub-£2m

We expect this part of the market to remain resilient in all but the most negative economic scenario. London suffers from a perennial lack of housing, especially affordable property below £500,000. For investors seeking safe-haven investments, favourable yields, good liquidity and domestic demand mean that properties below £1m are likely to do well, especially in areas where planned improvements in infrastructure are underway, such as Crossrail 2 and the Bakerloo Line extension.

Similarly, while domestic demand may be trimmed slightly by any Brexit-linked economic slowdown, it is nonetheless likely to continue to support prices of family homes in the £1-2m range, again given limited supply in and around London.

Conclusion

Without doubt, the uncertainty around Brexit will create headaches for the property market. But deals will continue to get done (see below). There will be opportunities to be seized, those sellers staying in the market are likely to be highly motivated, and the drop in sterling will make London attractive again to international buyers. For example, in dollar terms, the £2.495m apartment we are managing the sale of in Hans Crescent, Knightsbridge, is effectively more than £300,000 cheaper than it was last week, while the £5m 3 bedroom apartment on the 33^rd floor overlooking the River Thames at 1 Blackfriars is £625,000 less expensive for a dollar buyer. Please contact us if you are interested in either of these opportunities.

Indeed, 46% of Chinese buyers expect demand for UK property to increase, post-Brexit. London property is expected to continue to be a magnet for Gulf investors with dollar-denominated assets.

“It is our view that London will remain resilient, outward looking and enterprising, regardless of the terms of the Brexit settlement,” says Black Brick Managing Partner Camilla Dell. “At Black Brick, we stand ready to provide our clients with the advice they need to navigate the uncertainties around London’s property market as the UK embarks upon this new chapter.”

Acquisition of the month – St James’s Mansions, West Hampstead NW6

Our top acquisition in June was the purchase, for an American client, of a 3-bed 2202 square foot property in a mansion block in West Hampstead. Despite looking for more than two years, she had so far failed to close on the handful of properties where she had made an offer.

Part of the problem she faced was the size of London’s market: finding a property which meets specific criteria in such a wide area is incredibly time consuming and takes enormous tenacity to make sure you don’t miss the perfect opportunity when it becomes available.

Our understanding of areas and prices across London meant we were able to immediately focus our search. Our shortlist of five properties yielded the ideal outcome, in an area she had never previously considered, and at £749 per square foot also represented excellent value.

Managed Sale of the month – Lowndes Square, Belgravia SW1

The referendum result hasn’t brought all property activity to a halt. Just three days after the vote, we exchanged on a £7.25m offer that had been made before the Brexit poll.

The 3-bed, 3-bath apartment at Lowndes Square, SW1, had been on our managed sale books for more than a year, but after dropping the asking price from £8.95m to £7.95m, three potential buyers emerged, triggering a bidding war to secure the property.

Transactions are taking longer to complete in this market, but sellers who are prepared to be patient – and to adjust their pricing expectations to the market – can still be successful.