If you think Brexit may be about to hit the massive London real estate market, think again. It already has.
Prices in London have been tumbling at the fastest and steepest rate since the 2008 financial crisis, and from the viewpoint of international investors, top-quality London homes have now entered bear-market territory — meaning a fall of more than 20% from the top.
Thanks to the plunge in the British pound GBPUSD, -0.3916% since last year’s referendum on European Union membership, the price index of “prime central-London” properties is now down a thumping 23% from its 2015 peak when measured in U.S. dollars, sliding 17% in just the past year.
That’s an alarming amount of volatility for an investment generally considered extremely safe, and punctures the myth that the only direction for the city’s property market is up.
‘We’ve frightened off the savvy international buyer.’
Price falls “will have further to go [ ie run],” predicts Henry Pryor, a veteran buyer’s agent who’s been active in the London market for more than 30 years. “We’ve frightened off the savvy international buyer.”
Pryor estimates that at the top of the market — for homes selling for $25 million or so and up — prices have fallen 25% in sterling terms.
London property has been one of the most astonishing asset classes in the world in recent decades, and it has become a major portfolio element for the international super-rich. Over the past 40 years, prices in central London have risen 50-fold, according to real-estate agency Knight Frank. That is twice the rise in the Dow Jones Industrial Average DJIA, -0.13% over the same period.
But Britain’s forthcoming exit from the European Union, the political turmoil in the wake of the recent election, new taxes on transactions, and sky-high prices have all come together to send the London real estate market into reverse.
Experts here say that the boom earlier this decade caused developers to launch a massive wave of new buildings, many designed to appeal as investments to the international wealthy.
And while the Brexit shock has slowed the launch of new developments, those already underway really have no choice but to carry on to completion.
“The amount of overbuilding is eye-watering,” Pryor says. He adds that developers are trying all sorts of gimmicks to unload the flats they’ve just built.
On a recent walk around some of London’s latest luxury property developments, I noticed three things: First, many of the new high-rises had bunting on them advertising one-, two- and three- bedroom flats — implying there are plenty of units unsold. Second, there are still plenty of cranes completing new projects. Third, to rent one of these places the cost per year will be only about 3% of the purchase price. Rental yields are on the floor. British inflation officially is running at about 3% a year, meaning a landlord is earning effectively a zero percent real yield in return for his or her capital and trouble.
That doesn’t sound like an appealing investment.
There’s still a lot of international money invested in London property, of course. But if this new bear market, combined with Brexit worries, cause more investors to cash in, that would drive the market still lower. Meanwhile, as nearly all British mortgages have adjustable rates, the market is also vulnerable to any spike in interest rates.
I have been wrong about the London property market before. Certainly London, where I used to live, is a unique city. In the Western world its only peer is New York. Even if Brexit hits the U.K. economy, London will keep its status as the premier city, by far, in Europe. And homeowners benefit from Britain’s ridiculous building laws, which restrict the supply of new homes and therefore keep prices higher than they would be. Nonetheless, good assets can go down in price as well as up — as Londoners are discovering now.