2016 is going to be an exciting year full of volatility:
- Global stock markets are due a (severe) wobble after a relentless period of growth.
- Low oil prices will be a boon for many but a disaster for others
- Property prices in much of Asia have exploded in recent years. Will this echo the house price crashes in the UK and US of 2008?
- What will happen in Russia and Ukraine?
These are just a handful of the themes for this year.
All of this has serious implications for the London property market. I believe that there will be some excellent opportunities for buyers. However, certain properties are likely to see significant falls in value over the next two to three years.
These are the ones that you will want to avoid for now but could offer fantastic opportunities towards the end of 2016 into 2017.
What is currently happening in the London Property market?
To understand which are the properties to avoid buying this year it is important to understand what is currently happening in the market right now.
Last years May election heightened uncertainty has affected the market over the last 6-8 months which is unsurprising although mildly ironic as London has benefitted from global uncertainty over the last 5 years.
Initially the big talking point had of course been Mansion Tax – that has since been superceded by the changes to Stamp Duty Land Tax (SDLT).
I won’t go into the anomalies as I am sure you have all studied them. But my view is that the effect of the changes will be limited.
The change in cost up to £3m or an additional £63k is certainly annoying but I suspect that after the initial shock the cost will be absorbed by the market.
How? Well in the immediate future, those who want to sell will accept offers that are lower than the percentage increase in the tax. Indeed there have already been opportunities to buy at a good discount.
However, there will likely be a lack of stock over £2m and transaction levels will continue to decline as buyers and sellers adopt a wait and see policy.
This is why the timing of this announcement has been quite clever. Firstly there are historically fewer transactions in the run up to Christmas and the New Year. It is also a period when the vast majority of people take time off and the focus is away from business.
This pause will allow time for the dust to settle. The fact that transaction levels in prime central London historically fall 30% in the run up to the election means that again the market will have more time to adjust to the changes.
Indeed the shortage of properties that will be available to buy will likely mean that prices will fall but not dramatically (except in the odd instances where a seller is desperate to sell which is where the opportunities will lie).
The top end of the market will gradually get back to normal after the election; people will see that although prices have dropped, they won’t have plummeted, London will still be an exceptional city and prices will start to climb.
We will have a “new normal” in terms of transaction costs. Indeed this is not the first time this has happened to the market and we saw exactly the same happen with the last rise in SDLT and the introduction of the Annual Tax on Enveloped Dwellings (ATED).
Essentially, the Conservatives are hoping that these headline numbers will show voters that they are not just the party for the “rich”, that “we are all in it together” and that they are the party that can lead Britain into a brave new era.
Therefore as annoying as the SDLT hikes are, I think that this will not cause too many issues. Although the very top end of the market may become even less liquid.
But what about the other potential horror, Mansion Tax?
Now I think it is unlikely to appear in its current suggested form despite Ed Balls continuing to bang his drum.
What one has to remember is that ultimately politicians want the market to keep going up or at the very least not fall despite what they may say in public. Politicians, quite simply, cannot afford a housing crash or a weak economy if they want to be re-elected.
So what are the properties to avoid buying in 2016?
There has already been a reduction in prices since the increase in SDLT. Indeed a number of new properties have already come to the market at much keener prices than we saw last year. I think that this creates a buying opportunity which will last up until the election. It may even last a touch longer if labour win and buyers and sellers wait to see what they decide to do.
HOWEVER, this does not mean that you should simply rush out and buy a property, whether it is for your own home or investment.
You should avoid high density, new build developments that have been predominantly bought off plan by overseas buyers and which will complete in 2016 and 2017.
The reasons for this (in no particular order):
1. High Prices – Many of these developments are trading at significant premiums to other properties in the area. A premium is indeed warranted in most instances but not to the extent we are seeing. Of course, it is easier to achieve higher prices when selling to people in a hotel room, who have no understanding of the site itself and the surrounding areas. This is exacerbated in the “auction room” atmosphere that is created.
2. Short-termism – A sizeable percentage of the buyers are speculators who want to “flip” their apartments before completion. However, there is a limited market for these “resales”: other Asian buyers want to either “flip” the property themselves or at least feel there will be a significant increase in value by buying direct from the developer in the same development or another development if needs be.
Worse, a certain percentage of off-plan buyers are incapable of completing and are essentially options trading on property. They will not be able to complete on the property if they do not successfully flip it as they do not have the funds.
UK buyers have little interest in these developments. You can ignore the politicians bleating about selling the developments in the U.K. first or at least releasing the apartments at the same time as overseas. If the developers thought that they could sell them here then they would do so. It would be a lot easier than organising massive roadshows.
Quite simply, many of these developments are either too expensive or they are in areas which are of limited interest to British buyers.
3. Capital Gains Tax will now be payable by international buyers. This is a significant change in policy. The profits for serious international investors (i.e. those who actually do the maths) are suddenly reduced.
It should be noted that many international buyers buy property in London to diversify their geopolitical risk so the investment returns are not the focus. The key for these people is to have an asset in a safe location which they can sell or do what they wish when they wish. Nevertheless, the increase in taxes will make buying in these developments less attractive.
4. Stamp Duty Land Tax Reforms – The changes announced on 2nd December 2014 were unexpected. The good news is that they benefitted anyone buying property under c. £1.2m. However, the additional costs especially the higher the price over £1.5m will again detract from investors’ returns.
The headline numbers are:
- No tax on the first £125,000 paid
- 2% on the portion up to £250,000
- 5% up to £925,000
- 10% up to £1.5 million
- 12% on everything above thatThe tax is not on a “slab” calculation any more, so to see what the stamp duty costs are, I suggest you visit the official stamp duty calculator.
But as an indicator, the extra stamp duty payable will be:
£1m £1.5m £2m £3m £5m £10m
Additional SDLT payable:
£3,750 £18,750 £53,750 £63,750 £163,750 £413,750
5. Rental Voids – In developments where there is a huge number of investors there will be long void periods as there will not be the tenant demand. This will be a particular issue at Battersea Power Station and the developments in SW8 especially before 2020 (the London Underground extension will not open until 2020).
According to Savills “Overseas’ buyers purchasing property as rental investments only account for c. 7% of all greater London residential transactions. The percentage seems much larger due to high investor activity in the new build sector which accounts for less than 10% of all London transactions”.
6. Rental Forecasts – The rental returns being suggested by some developers are, in my opinion, rather bold… In addition the service charges mean that the net yield will be decidedly low.
7. A Potential Tax on International Buyers – As clients and long time readers of my reports know, I never underestimate the stupidity of politicians. This is neither the time nor place for a diatribe against political interference and the ensuing unintended consequences. Suffice to say that elected officials, including central bankers, feel that they need to be seen to be doing something. This has been exacerbated by 24 hour news channels.
If large swathes of property are left empty it is highly likely that populist politicians will introduce a tax to try to prevent properties being left unused. This may sound sensible to some but actually it deflects from the real issue which is the lack of affordable housing and the dire planning issues we have in this country (to name just two).
If such a tax is introduced or even mentioned in the press, it will deter many future buyers and lead to sales by overseas’ owners. Again this will disproportionately affect the new build market.
8. The Mortgage Market Review – If you wish to buy a property that is being “flipped” – in more formal language, where the contract is being “assigned” – and you need a mortgage then you will not be able to buy due to new rules being implemented by the Council of Mortgage Lenders (CML).
These state that companies can only offer mortgages on properties that have been owned by the seller for at least 6 months. The person “flipping” the property does not own it as he/she has not completed on the property. Therefore the developer is still the owner. This reduces the number of potential buyers for flipped properties.
You should also consider why the CML insists on this. Is it because the “uplift” in value of new build properties is hard to value?? Indeed, it is a tacit admission that the value of the new developments is not clear from the offset although the mortgage companies will lend if you are buying direct from the developer.
9. An Asian Property Crash – This may sound odd but there is a proven property cycle that lasts 18.6 years. This has been traced back centuries in the UK & US, but also holds true for Australia amongst other countries (if you would like to learn more about this you should read “Boom & Bust” by Fred harrison and “The Secret Life of Real Estate & Banking” by Philip Anderson).
In the UK, the recent house price crashes were in 1972, 1990 and 2008. The only time the cycle has been broken was during the two world wars.
The tell-tale sign of the bust is a parabolic rise in land prices just prior to a house price crash. The last property crash in Asia was 1998 and Knight Frank reports that land prices between December 2011 and December 2013 rose in Bangkok – 190.7%, Jakarta – 184%, Kuala Lumpur -67.2% and Beijing – 37%.
I should point out that the land price cycle in Asia is unproven mainly due to a lack of data. However, if the cycle holds true then the demand from Asia will disappear for a few years which will disproportionately affect the new-build developments.
10. The High Density Towers & Developments are not attractive to British tenants. Yes, some will like the gym and other amenities, but, on the whole, tenant demand for these properties is likely to be thin. There simply won’t be enough international demand to make up for the domestic shortfall which means that net rental returns will be much lower than anticipated.
11. Location, Location, Location – many new developments are in Zone 1 and 2. However, zones 1 & 2 cover a multitude of areas. Some of which are far from prime – think Elephant & Castle in zone 1, for example. Now the added infrastructure that will accompany many of these new developments will add to house prices in the area. However, much of the uplift (and in some cases an additional premium), is already priced into these new developments. You would probably be better buying traditional stock which will see more uplift in price.
12. Location, Location, Location (Part II) – note how so many of the brochures focus on Bond Street, Buckingham Palace, Harrods, etc. Many of these developments are quite a distance from these areas and are certainly completely different in terms of ambience and infrastructure. Remember they are called “sales brochures” for a reason.
In addition, advertising standards in some countries not as strong as in the UK. This is why THE CHINA DAILY reports: “Unsuspecting Chinese people are being ‘ripped off’ in the London property market… they are paying for properties that aren’t actually in the best locations.”
And THE SOUTH CHINA MORNING POST notes: “an advert for properties in fringe Maida Vale contained pictures of Buckingham Palace and the Houses of Parliament… Maida Vale is nowhere near either.”
This is not a complete list of the reasons why I think many new developments will see price falls over the next two to three years. Some of the reasons are specific to certain developments which I will not go into here.
Obviously I cannot guarantee that prices will fall and actually I expect the developments to be successful over the long term. However, there is a high probability that there will be opportunities to cherry pick apartments in many of them over the next few years at significantly lower prices than now.
The risk in buying now is just too high. And don’t be fooled by statistics showing that the buyers of Phase 1 at Battersea Power Station, for example, are sitting on 40% profits. Yes, this is true, but then the entry prices in Phase 1 were about 30%-40% lower than in the newer phases.
Having said this, you should not rule out new developments entirely. There are some new developments that will be successful, but they will be the ones where there is a general lack of similar apartments in the immediate area and that offer something unique or, at least, rare.
As ever, it will pay to be selective. Of course, the only way to do this is to have complete, up to date information on the market (there are two government policies that, if implemented, would cause prices in the new developments to sky rocket).
If you would like to receive accurate information on the prime London property market, please email firstname.lastname@example.org with the following details so that we can keep you updated with advance information and send you the most relevant news and trends:
- What are your preferred areas (e.g. Knightsbridge, Chelsea)?
- How many bedrooms do you require?
- What is the minimum size in sq.ft. or sq.m.?
- Would you prefer a house or apartment?
- Is the property for your own use or an investment?
- When do you plan to make an acquisition?
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