For many years, the mathematics of investing in London real estate was simple. You bought, you sold, and with price rises in the region of 10% annually or more, invariably you made a quick profit. No longer.
A combination of political turmoil over Brexit and tax hikes to curtail steep price rises has dampened the market, and prices have been either falling or remained flat.
With the U.K. due to leave the E.U. on March 29, 2019, and leading Brexiteers like Boris Johnson quitting the cabinet, confidence is low. With transactions down 20% over the last four years, according to Residential Analysts, who calculated the figure using Land Registry and HM Revenue & Customs data, buyers and sellers are sitting tight, waiting to see what deal will be struck.
Yet the situation can represent an opportunity for the savvy investor. Experts advise choosing carefully which neighborhood to buy in, and planning for the long term, five to 10 years at least, to ride out any further falls. And with fewer buyers on the market, there’s also an opportunity to cut the price a great deal, further increasing the potential for a high return on investment.
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"Some of the more expensive properties that have been languishing on the market have asking prices that are 15% to 20% lower than 2014," the year new stamp duty rates on luxury properties went into effect, said Marcus Dixon, head of research at data company LonRes, which tracks London sales and lettings.
"In high-value areas of London," Mr. Dixon continued, "we’ve seen prices fall for three to five years, yet now there are signs the price fall seems to be slowing and bottoming out in areas like Kensington, Holland Park, Notting Hill, and Mayfair, and that obviously creates some opportunities if you’ve got a few million to spend."
Another area to consider might be the city of London, the financial district, where residential stock is limited and prices seem to be bucking the trend, going up by 4.5% in the first half of 2018 according to LonRes, compared with the same period last year.
Henry Pryor, an independent market analyst, who has held senior positions at Savills and Strutt and Parker and set up The London Office, advises high-net-worth individuals on their purchases.
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"Very few people want to buy or sell property in the few months leading up to our monumental political divorce from Europe next March, which is why 50% of homes on the market in Belgravia and Mayfair have been on the market for over a year. Yet there are people who have to sell, whether it be because of divorce, debt or death, so if you have money to spend I can’t remember a time since the credit crunch in 2007 when you could get a better deal."
Some emerging areas of London are seeing a lot of new builds flooding onto the market, without the buyers or tenants to service them.
"Buying into areas of new supply is more risky," Mr. Dixon said. "On one hand, there is potential for the areas to improve, but on the other hand, there is the risk of continued high levels of supply suppressing prices and the potential for growth."
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One such area with a large number of new developments is Nine Elms, Europe’s largest regeneration project, on the south bank of the Thames, extending from Lambeth Bridge in the north to Chelsea Bridge in the south.
Nine Elms is undergoing a £15 billion (US$19.8 billion) transformation, and there are 20,000 new homes set to be built in 39 developments. Prices are high and data from LonRes shows 43% of properties for sale have had a price cut. Prices range from £560,000 (US$740,515) for a one-bedroom apartment to £15.49 million (US$20.5 million) for the 33rd floor of Aykon London One, which is 7,000 square feet and has interiors designed by Versace.
In some areas of Nine Elms, homes are selling for £2,200 (US$2,906) per square foot, yet most of the demand in London is for more affordable housing. Figures from Savills show that 68% of buyers in the capital are looking for homes below £450 (US$594) per square foot.
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For investors then, it could be a smarter move to buy more affordable homes in the outer boroughs, close to good transport links, or near to one of the new Crossrail or future Crossrail 2 stations, where they can get a potentially higher rental yield in the region of 6% to offset all the new taxes associated with buying to rent.
"In the past investors, have bought for capital growth and settled for lower rents," Mr. Dixon said. "Now it’s about getting the right combination of rental income and capital growth. Investors might do better to look at outlying areas like Croydon, for example, which is more likely to offer the right combination of affordable housing for a normal working Londoner to rent, in close proximity to transport into central London."
Henry Pryor advises searching for a rental yield of at least 6% in order to offset the extra taxes brought in for buy-to-let investors.
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Investors are still adjusting to the 3% stamp duty surcharge for "additional properties." which was brought in from April 2016.
Then came the removal of tax relief on mortgage interest for higher-rate taxpayers, which is being phased in from April 2017.
Yet despite these extra taxes, and the current uncertainty and complexity of the London real estate market, Mr. Dixon expects that it will still be a safe long term bet, and that overseas investment will continue to flood in. "Historically, London has always been a safe haven for wealth over the long term. Many overseas buyers have long-term links to the U.K. in terms of business, schooling for their children and friends and family. I don’t see that market going away."