Still Waters Ahead
Central London is increasingly like housing markets in Central and Northern Europe where sale prices are stable and renting is the dominant tenure. As new studio apartments approach £500,000 across Midtown, City and Docklands we do not envisage any significant price growth over the next 2-3 years as long as the UK remains a low inflation environment. Generation Rent will face years saving for a deposit before being able to buy a home in Midtown, City and Docklands.
London is unlikely to fall into line with government policy on homeownership. It does not have the land available to expand supply to a level with any prospect of satisfying demand. The bar for entry level properties is too high for most buyers and we foresee a future where families who wish to stay in Central London raise children in rented homes. Home ownership in Central London will remain beyond the reach of first time buyers even after government incentives and buying at a later age will become the new norm.
We expect the proportion of London’s population in private rental homes to rise towards 40% over the next 10 years. Most new homes in the planning pipeline or under construction including the growing number of Build to Let developments, will add to the supply of high quality rental accommodation.
Buyers will remain scarce throughout 2016 for properties over £1.5 million as SDLT continues to weigh on the market. The additional 3% after April 2016 will only add to the lethargy.
We do not expect capital growth in 2016 across Midtown, City and Docklands, although we expect a short term increase in transactions in Q1 as investors seek to complete purchases before additional SDLT is introduced in April 2016.
Traditional Tory voters may well exert growing pressure on the Chancellor to review taxation policy for higher value properties and to revise downwards the top rate of 12% (for first homes over £1.5 million). At the same time we expect more parents to look at ways to release equity form their homes to assist children entering the property market.
With a strong economy and growing employment, London will remain attractive as a long term investment, even if the short term prospects are flat. We do not see the additional SDLT adversely impacting greatly on the number of second home or pied a terre owners in London. The same cannot be said for buy to let investors who will be less inclined to accept high purchase costs and lower returns. Overseas buyers particularly in the Far East will also regard the increased SDLT and other tax burdens announced by the UK Government as targeting them directly and could look to other parts of the world for their property investments. This will cause developers difficulties when they look to sell off-plan overseas.
The greatest threat to the market is from geopolitical uncertainty as the UK joins the air strikes on Syria and the western world is still reeling from the Paris attacks. Concerns over the global impact of economic slowdown in China and the fall in oil prices might reduce profits in the financial sector but it reinforces the arguments to bring money to more stable markets, like the UK.
There is home-grown uncertainty ahead in 2016: an EU referendum and a London mayoral election. After 8 years in office, whichever of the two main condidates succeeds Boris Johnson, he will present a more serious face to the world. Also any decision to leave the EU would inevitably cause economic instability with some businesses relocating and all adjusting to very different operating conditions.
Interest rates may finally rise in 2016 after an exceptionally long delay. Although the rises have been anticipated for some time, they will dampen any prospect of price growth.
In a backlash against internet marketing, we expect a greater level of discrete marketing – where serious sellers will engage with agents for off-market selling, in order not to alert neighbours of their intentions. There is a sense that there has been over-exposure on the internet and – rather like the resistance to agents’ boards in the past – vendors are choosing not to go online.
Given the number of development completions that will inevitably find their way into the rental market in 2016, it is difficult to foresee any rationale for rental growth and so we expect rents to remain stable but with increased choice for tenants. Since we are not expecting any price change either that will leave yields unchanged in the year ahead for first time in five years.
So, with little prospect of capital or rental growth, the additional tax burden on landlords will mean it will be a fairly unrewarding year for investors – despite long term prospects. For the time being, landlords have become the target of government plans to raise additional tax revenue and, with interest rate rises in prospect, landlords are considered to be a risk to economic stability.
New council tax bands would be a logical move in the government’s drive for additional tax revenue especially as it could be targeted at more affluent segments of the population.
Despite the negative sentiment that has gathered against using homes as a form of investment, it is a deeply engrained practice in the UK and, much of government policy is specifically designed to encourage the next generation to become homeowners to safeguard their future. In the end, it seems likely that most people will continue to see property as a safe home for capital and that in itself makes property an attractive long term investment proposition.
Telephone: 020 7250 1012
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