London's prime residential sector
Life after Brexit
It has been an extraordinary few months since the UK voted to leave the European Union, a new prime minister and cabinet were appointed in Whitehall, sterling recorded double-digit percentage falls in value and domestic interest rates and monetary policy further relaxed from already record positions.
It will be some time before the UK redefines its trading relationships with Europe and the rest of the world, and the impact of the Brexit vote and its aftermath on the real estate sector in the UK can be fully assessed.
Here are the areas we’ve been watching.
The London residential sector - The uncertainty in the market in the lead-up to the Referendum was being referenced by some as a reason for investors being reluctant to commit to purchases prior to the vote. Our analysis of transaction volumes in election and non-election years shows that historically, political events such as domestic elections have not materially impacted the market, although there is often a slowdown in the second quarter followed by a bounce in activities in third quarter.
Consumer confidence - The first half of 2016 witnessed positive but weaker than expected GDP growth and reducing consumer confidence measures.
Tax policy - In April 2016, the UK Government made changes to the SDLT, which were particularly felt in the prime London Market.
Affordability - The full impact of historically high price-to-income ratios in the London market are being shielded by low interest rates. Affordability is less of a concern in the prime market when compared to the mainstream residential market in the UK.
The impact of a lower exchange rate - It is unlikely that currency movements alone will fuel a recovery in activity.
What does this mean?
The prime London residential market is unlikely to be staging a dramatic recovery in the short term, and the Brexit result is likely to just accelerate the market adjustment that was already taking place.
These changes in the market conditions are likely to have some far-reaching impacts; for example, more sites for general market housing may become available throughout London.
Some elements of the public sector that have been working up large land disposal projects underpinned by elements of prime residential development may have to reconsider their budgets and the contributions that these programs were forecast to make. There may also be contagion issues from contractor defaults as an already stretched construction sector comes under further margin pressure from reduced activity.
The operators in the market therefore need to adjust to the new environment and these changes are likely to impact market participants in different ways. The impact will depend on how funders, investors and developers react to the evolving situation. In the light of a likely continued reduction in demand at the upper end of London’s residential market, developers are going to need to be flexible to adapt their schemes to cope with the new reality.
In particular, we expect that the impact will be felt most markedly in prime priced new build schemes in marginally prime and non-core locations. To identify the new opportunities that will inevitably be created, each participant in the market needs to ensure that they are as prepared as possible for the changes that they will have to adjust to.