January 2020

Tory win puts PCL on track for a rebound in 2020

The London prime property market is starting the new decade on a firmer footing than it has been for several years, with uncertainly around Brexit significantly reduced – if not yet eliminated – and the risks of a highly redistributive Labour government removed for at least five years.

However, with the bottom of the market now likely to be in the rear-view mirror, and transaction volumes expected to increase strongly, conditions are likely to get tougher for buyers, and prospects for stronger sterling could begin to crimp overseas demand.

“Now the election is out of the way, the attitude of sellers has already changed,” says Camilla Dell, Managing Partner at Black Brick. “They have become much more confident and are likely to take a much firmer line on offers.”

Certainly, most analysts and agents expect pent-up demand to push prices higher over 2020 (see forecasts below). In an early indication of buyers’ intent, visits to online property portals jumped immediately after the 11 December election, won by the Conservatives with an unexpectedly large majority, with Rightmove claiming that traffic was up over a quarter in the following four days compared with the same period in 2018.

Indeed, there has already been a bounce in transactions closing, with Savills reporting that the number of homes sold worth more than £5 million was up by a third in December, year-on-year. And, days after the election, Berkeley Group, run by veteran housebuilder Tony Pidgley announced a £120 million deal with supermarket chain Morrisons to acquire and develop a site in Camden, in a sign that London’s market is set to rebound.

“Recovery is likely to be seen first in the prime neighbourhoods of Mayfair, Kensington and Belgravia,” notes Dell, “because they fell first, and have fallen further than other postcodes.” Prices in PCL fell by around 20% between 2014 and the end of 2019. 

However, for all the relief with which the Conservative win was met, PCL is not out of the woods. In particular, despite Boris Johnson’s claim that a Tory government will “get Brexit done”, the process to negotiate a free trade agreement between the EU and the UK will be long and fraught, and the government has pledged not to extend the negotiations beyond the end of 2020, meaning that an economically disastrous no-deal Brexit cannot be ruled out.

“We think a collapse in the negotiations is very unlikely,” says Dell, “but as we’ve seen with the Brexit process thus far, the talks are likely to go to the wire. Such brinksmanship would create volatility and jitters across all UK markets.”

On the other hand, progress towards a trade deal with the EU could be a partial negative for a big cohort of PCL demand: the resulting recovery in sterling would make UK property less attractive for dollar-denominated buyers.

“It’s worth noting, however, that sterling remains at historically low levels,” says Black Brick Partner Caspar Harvard-Walls. “Buyers who bought sterling at £1.20 to the dollar, where it was trading in early September, will have locked in a discount of 40% compared to where sterling was trading in in mid-2014.”

Stamp Duty surcharge on the cards

The Conservative manifesto was, comparatively speaking, light on commitments in general, and regarding property in particular. However, it did include a commitment to introduce a 3% Stamp Duty surcharge on purchases of property by non-UK residents.

It quotes a study showing that, between 2014 and 2016, 13% of new homes sold in London were bought by non-residents, adding “significant amounts of demand to limited supply”, making it harder for residents to take their first step on the property ladder.

“We certainly share the government’s concern about the availability and affordability of London property, especially at the lower end of the market,” says Dell. “However, we don’t think this is the right mechanism to address it.”

“Rather than seeking to tax or discourage overseas buyers, the government would be better to increase the supply of social and affordable housing,” says Dell. “However, we recognise the politics around the issue, and I think it is highly likely the surcharge will come into effect.”

Dell believes that its impact on PCL is most likely to be felt in the £1-5 million price bracket, particularly in new build developments that are popular with overseas buyers, and where the additional 3% may deter buyers, unless they see it coming off the purchase price. The higher end (£10 million plus) of the market is likely to be less impacted. “As we’ve seen with previous Stamp Duty rises, prices have tended to adjust within a few months.”

The major outstanding question is whether the surcharge is introduced on the day of the budget, which will be held on 11 March, or whether it will come into effect at a later date.  “The implementation of the 2016 Stamp Duty surcharge on buy-to-let properties was delayed, triggering a huge spike in transactions by buyers looking to avoid the higher rate,” notes Dell. “It’s likely that the Treasury will seek to bring this rise in more quickly.”

“Our advice for overseas buyers is that, if you can close the purchase before the 11th March, you’d be wise to do so,” she says.

Forecasts for 2020 and beyond

The estate agents have released their annual price forecasts, some of which were published before the election result, and almost all of which will have depended on analysis conducted before the result of the election was known. Most appeared to have been prepared assuming a Conservative win, but few will have factored in a majority of the size that transpired.

All forecasts see PCL prices in positive territory in 2020, with most in the 1-3% range. As in previous years, Strutt & Parker have offered ‘best’ and ‘worst’ case scenarios, with the former – which assumes some “bounce back” as the political and economic outlook become more stable – sees PCL house prices rising 5% in 2020 and 28% over the coming five years. This forecast is considerably ahead of the next highest five-year forecast, of 22% by Hamptons.

Overall, however, analysts and agents are in agreement that UK property markets are likely to put the worst of the Brexit uncertainty behind them, with the next five years set to deliver steady – if not spectacular – growth in PCL property prices.

Black Brick Partner Caspar Harvard-Walls comments, “The issue with any forecast is that PCL is not a homogenous market and so inevitably there will be limitations with how accurate such a forecast can be. At Black Brick we see a far stronger outlook for those properties that are best in class whose values were being held back by the political instability of the last few years which has now passed. Vendors of such assets will be far less flexible on their asking prices and indeed data from Lonres has shown that the last 30 days have seen a 137% increase in the number of properties raising their asking prices when compared to the same 30 day period a year ago.

We foresee best in class PCL properties rising by as a much as 10% over the course of this year as buyers confidence returns and vendors take a firmer line on values”.

Sales Forecast:

Rental Forecast:

Acquisition of the  month 1: Marlborough Road, TW10 – £4,150,000

Our British clients had been living in west London for over 20 years but had decided that they wanted to live somewhere with a stronger sense of community and nearer to their second home in Dorset. They wanted a family home, with at least four bedrooms and a good-sized garden, and preferably a property which had been recently renovated.

Through our strong relationships with local agents in Richmond we were able to access a house which was available on the lettings market but not for sale. Located on the best road on Richmond Hill, it matched the brief perfectly: with four bedrooms, off-street parking and a lovely garden, and which had been the subject of a ‘back to brick’ renovation only a few years ago. We managed to negotiate £100,000 from the asking price and contracts were exchanged within four weeks and just five days before Christmas. Crucially, the house never came onto the open market.

Acquisition of the month 2: One St Johns Wood, NW8 – £2,900,000

Our Indian client was looking for a family apartment in St John’s Wood close to where his family already owned, and which met his complex requirements relating to Vastu shastra, an Indian system of architecture which imposes strict principles on the layout of the home.

Vastu requirements can sometimes be fulfilled in new-build developments, particularly when buying off plan, as long as the developer is open to making changes to the layout. Our direct relationship with developers means we can gain access to opportunities early, allowing our clients to select the best options and make changes.

We identified a superb off-market, new-build development less than a two-minute walk from where our client’s family live. Amenities in One St John’s Wood – set to be one of the most luxurious new-build developments in the area – include a 20-metre swimming pool, gym, sauna, cinema room, private dining room, club lounge, concierge and residents lobby, residents’ roof terrace and valet parking.

We analysed the block and its units and concluded that combining two smaller units would give our client the size of apartment required and, as importantly, a layout that could be re-organised to comply with Vastu. Not only were we able to get the developer to agree to the amalgamation of the units and change in layout, but we were also able to negotiate a discount from the asking price.

Acquisition of the month 3: Sloane Gardens, Chelsea, SW3 – £1,750,000

Our Canadian clients were looking for a PCL pied-à-terre close to a tube station and with high ceilings, period details and green views. They were only in London for a week and had limited time for viewings.

Despite this constraint, we secured them a stunning off-market one-bed apartment in Chelsea, overlooking private communal gardens located just a minutes’ walk from Sloane Square station. The apartment has the ideal east-to-west aspect, which gives the bedroom light in the morning, and the living room light in the afternoon. It has wonderful period details, including exquisite ceiling mouldings and parquet flooring.

Our relationships with agents gain us priority access. We viewed this apartment before it went on the market, enabling us to offer and agree a purchase price without competition from other buyers. Despite being off-market, we were still able to negotiate a saving of £45,000 from the asking price.