After years of spiralling property prices, activity in central London – the most popular overseas property market for UAE buyers – will slow to a grinding halt next year.
Experts predict that a combination of factors will come together in 2015 to subdue what has been one of the world’s best performing and most attractive housing sectors for the past five years.
"The growth for the last five years has been phenomenal but in the end you just can't expect the market to keep on climbing like that," Yolande Barnes, director of world research at Savills, told The National.
The news could have a major effect on Middle Eastern investors who have been steadily buying up prime London real estate in droves. Savills reports that between 2010 and 2012 Middle Eastern investors accounted for 6 per cent of foreign investment in new London homes – a number which has risen to 26 per cent between 2013 and the first half of this year.
So why are London prices set to slow down?
Firstly researchers say the uncertainty surrounding the planned general election in May is likely to dissuade potential homebuyers from making the decision to buy as they wait to see who wins.
“The reason we think the crunch will come next year is because of all the uncertainties surrounding the election, which is being used as a good excuse to pare down buying activity,” Ms Barnes says.
Savills predicts that although average prices across the UK will increase 2 per cent next year, and all of the regions outside London will experience slight increases of between 1 and 3.5 per cent, prices in the UK capital will be static next year.
And with two of the three main parties, the Liberal Democrats and the Labour Party, espousing a so-called “mansion tax” that would create an annual levy on the most expensive properties in the country if introduced, analysts predict that house prices for London’s most desirable locations – usually the ones which most appeal to GCC investors – will be the most affected.
For prime London property the outlook is poor. Savills predicts that even without the introduction of a mansion tax, average prime house prices will fall 0.5 per cent in 2015. And if a full mansion tax is introduced the agent estimates that average prime prices will plunge by 5 per cent, with those worth more than £10 million (Dh57.9m) experiencing the biggest falls with a 10 per cent drop in value.
“To some extent the mansion tax has already stopped investment in UK property,” Ms Barnes says. “We have seen a definite slowdown in the country house market for price bands between £2m and £4m, which was not the market the tax was aimed at.”
Savills estimates that there are about 97,000 homes worth more than £2m in the UK, of which approximately 40,000 are worth between £2m and £3m, and a further 30,000 between £3m to £5m. To achieve a proposed £1.2 billion target – and allowing for tax leakage from stamp duty and inheritance tax as values fall – the charge for homes worth between £3m to £5m could be in the order of £7,000 a year, rising to £125,000 for the estimated 1,500 properties worth more than £20m.
Aside from the thorny issue of next year’s election, researchers add that next year there is likely to be a perfect storm of interest rate rises and an increase in the value of sterling putting off potential investors, domestic and foreign. Other commentators point to the fact that London’s success from capitalising on its “safe haven” status during the global financial crisis is coming to an end as other more risky (and potentially more rewarding) locations regain appeal.
“The positive run began in November 2010, the same month Ireland became the second European country after Greece to receive a bailout as concerns grew over the future of the euro zone,” says Tom Bill, the head of London residential research at Knight Frank. “Ireland has since left its bailout programme and the economic risks that drove buyers into the safety of London property have been superseded by political risks that have created a mood of caution. As a result there is growing evidence that asking prices are having to adjust to more subdued market conditions,” he says.
Knight Frank has reported a rise in the number of Middle Eastern investors starting to look elsewhere in Europe for prime investment opportunities. They say key cities benefiting from an increase in attention include Paris, Florence, Rome, Venice, Geneva and Barcelona.
“The trend is driven by buyers who would have previously considered property options in London but are now looking to spread their risk across Europe as London, in their terms, has become overheated,” says Alasdair Pritchard, an associate in Knight Frank’s international team.
“The reason for people choosing these specific cities is that they are viewed as international cached locations that’ll predominantly hold their value,” Mr Pritchard adds.
“In the case of Middle Eastern buyers who like to preserve their wealth within bricks and mortar, this view is prevalent. These city markets are certainly seeing more of the action than their respective surrounding rural markets. Turnkey apartments are attracting the most interest, especially those that will offer a solid rental return, whether annually or during the holiday season.”
Others suggest that Middle Eastern buyers looking for high returns should look at lower value, higher-yielding property in London and the UK.
“There are still opportunities for Gulf investors in the UK,” says Savills’ Ms Barnes. “We expect there to still be potential in the secondary market with rental increases making up for whatever might be lost in future capital growth.
“London is still experiencing a huge shortage in demand for housing so if you start to look at more affordable properties in areas like Upton, West Ham and beyond you can find yields of around 7 per cent.”
Yet for others the predicted slowdown next year is just a flash in the pan in a longer term continuous trend of growing prices.
Although Savills predicts that prices for prime central property will fall by an average of 0.5 per cent next year without a mansion tax and by about 5 per cent if one is introduced, it believes that over the next four years prime London property prices will rise by more than 20 per cent.
“The Middle Eastern investors we deal with want to be in London; they understand London and they want to be there for the long term,” says David Godchaux, the chief executive of Dubai-based Core Real Estate. “A lot of our investors have been buying in London for many years and we expect them to continue to do so. Often they have family there or children at university.
“Yes, there could be a bit of a slowdown next year, that is only to be expected, but we certainly do not expect Middle Eastern investors to sell up as a result or even to stop buying in the long term.”
lbarnard@thenational.ae
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