London’s luxury market, long home to aristocrats, wealthy Middle Easterners and Russian oligarchs, has been more aptly known lately as the home of plummeting real estate prices.
A series of tax bumps on top-tier properties, penalties for second-home buyers and Brexit-related uncertainty, have made the city’s real estate outlook gloomy since 2014.
But now, as prices appear to have mostly plateaued, according to experts, central London’s prime market looks poised to bottom out, appealing to buyers once more. And as long as they’re prepared to play the long game and hold on to their investments, a stake in London luxury can again be a good bet, experts say.
Scraping the Barrel
“For the central London market, it seems we’ve seen the falls we’re going to,” said Marcus Dixon, head of research at LonRes, a real estate data firm. “The feeling that I get is that we’re bumping along the bottom.”
The central London market “is always going to be where people want to invest, but people have to look at it as a much longer investment,” Mr. Dixon said. “People aren’t going to cover their costs in three years anymore.”
Prices for prime real estate in central London are down 16.7% compared to September 2014, according to April’s first quarter report from U.K. real estate firm Savills. The rest of the U.K.’s prime market has performed far better in the same time frame: Prime properties in the urban areas of the wider South of England rose in value 10%; prime properties in the urban areas of the Midlands and North of England saw increases of 8.9%; and prices of prime urban Scottish properties rose 10.2%, according to Savills.
More recently, first quarter 2018 prices for prime central London properties were down 1.1% compared to the previous quarter, the report said. Quarterly declines have been hovering around the -1% mark since early 2017, after seeing larger falls in the latter half of 2016, when the third and fourth quarters logged price declines of 2.64% and 2.09% respectively.
The recent easing of quarterly declines is a sign prices are approaching the bottom of the trough, according to Lawrence Bowles, associate director of residential research at Savills.
But while price growth is not likely on the immediate horizon, Mr. Bowles said, Savills is expecting the property market to begin recovering in 2019, with the real bounce back coming in 2020.
Savills predicts house prices will rise 8% in central London during 2020; another 5.5% in 2021; and another 3.5% in 2022. Over the next five years, the real estate company is anticipating compound growth of 20.3%, further underlining that those buying will need to think long term about any real financial gains.
This isn’t unusual for London, a city that is used to seeing large peaks and troughs. Between the first quarter of 2008 and the first quarter of 2009—in the midst of the financial crisis—values in prime central London fell more than 20%. In the five years between the first quarter of 2009 and the same period in 2014, prices rose almost 80%, according to Savills data.
This time around though, such a rapid bounce back seems unlikely, according to Mr. Dixon, who predicts a slower return to growth, “which isn’t a bad thing,” he said. “You want a sustainable market.”
But that doesn’t rule out more drops being on the horizon, either.
“I would be cautious in saying we’ve reached the bottom,” said Camilla Dell, managing partner and founder of Black Brick Property Solutions, a London-based property consultant. “Do I see it dropping another 20%? No, but I could see another 1%, 2% or 5%.”
What Went Wrong
London’s shaky market can be blamed on a number of factors, beginning in 2014 when the government made changes to stamp duty, the U.K.’s tax on homebuyers. Though the 2014 changes reduced stamp duty for many, it was raised for those buying houses worth more than roughly £1 million (US$1.35 million), and the London market—laden with pricey homes—slowed as it became more expensive to buy.
Then in the last couple of years, an additional 3% surcharge on stamp duty was added to purchases of second, or additional, homes. And a recently passed tax incentive for first-time buyers only applies to properties priced at £500,000 (US$675,250) or below.
The upcoming removal of the U.K. from the European Union—the result of 2016’s referendum—only compounded the problem. The uncertainty brought a level of hesitancy to the housing market that is still to be resolved.
The Right Time to Buy?
“The fact that prices have dropped and don’t appear to be dropping much more will encourage more investors,” Mr. Dixon said.
And now, with an increasing number of sellers more realistic about what their homes are worth, there are some real opportunities in central London, he added.
More than half of London’s prime properties are changing hands for below the asking price, according to April’s prime property index from private bank and wealth manager Coutts. Buyers can now expect to have an average of 12.1% chopped from the asking price of the top-tier properties they’re purchasing.
For those willing to hold onto their investments, “you could argue that it might not get better than this and if you wait on the sidelines you might miss the opportunity,” Ms. Dell said.
“All of the forecasts over the next five years are positive,” Ms. Dell said. “We’re in the window where people buying now will get a good deal.”
Timing is also looking good for dollar-based investors, who can take advantage of both London’s lower prices and the dollar’s currently high value against the pound, according to Ms. Dell. Back in June 2014, $1 was equivalent to around £0.58, today $1 nets roughly £0.74.
A Safe Bet
London still has plenty of draws beyond its property price growth. Its strong educational system and top-notch universities, as well as its relative political stability, continue to be drivers of interest and purchases by international buyers.
But needs-driven buyers—those looking for primary homes rather than vacation homes—are really fueling the market now, according to Tom Bill, residential research associate at property consultancy Knight Frank.
“Pent-up demand has formed over the last couple of years, and there comes a point that people have to move,” Mr. Bill said. “So there’s an element of that that’s driving the market and helping prices rebase.”
“London is still an attractive place to be, Brexit doesn’t appear to be materially changing that,” he added.
A Full Recovery?
Though statistics and experts point to the market bottoming out, that’s not to say the market has fully recovered.
“It’s too soon to call it a recovery,” Ms. Dell said, adding that the market is still quite fragile.
And with Britain’s official departure date from E.U. scheduled for March 29, 2019, “it’s unlikely we’re going to see any significant growth before Brexit negotiations become clear,” Mr. Dixon said. “That’s what’s holding back the market most.”
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