London residential prices may pick up from 2016 trough

/ EdgeProp |

April 28, 2019 7:00 AM SGT

For the past 18 months, prices of residential properties in Central London have been relatively stable, and they are likely to recover from the last trough in 4Q2016, according to research by JLL. “[Residential property] prices will start to recover once ‘Brexit’ negotiations are successful. Property prices in prime central London, although down by about 15% to 20% from their last peak in 2015, will likely recover over the next five years,” says Regina Lim, head of research for Southeast Asia at JLL Singapore.

While the political backdrop remains fluid at the moment, record high levels of employment underline the resilience of the UK economy

London’s residential property markets have laboured under new additional stamp duties imposed since 2015, and market uncertainty has persisted since the Brexit referendum in 2016. Earlier this month, British politicians were given six more months to reach common ground regarding Brexit terms.

Assuming a reasonable Brexit occurs before the end of this year, JLL projects that prices of Central London residential developments will grow by 1.5% this year compared to 0.5% growth in Greater London and the entire UK. By 2021, the price growth forecast for Central London properties could reach 5%, more than the 4% projected for prime Central London properties and 3% for the UK residential market.

Infrastructure

Any expected recovery of the global city’s residential property market will likely be supported by infrastructure projects like the upcoming Crossrail Line, officially called the Elizabeth Line. The £15.4 billion ($27 billion) Crossrail Line is currently Europe’s largest infrastructure project, and is expected to serve more than 200 million passengers annually.

The government predicts that more than 90,000 new homes will spring up along the route over the next three years. “Crossrail will improve the connectivity and ‘rentability’ of projects around its stations. Typically in the UK, rents don’t rise until after infrastructure is completed. Property investors seeking a source of long-term recurring income could buy a property now before prices have significantly risen, to benefit from the expected tenant demand over the next few years,” says Lim.

Other infrastructure projects include the £1 billion Northern Line extension that is expected to open in 2021. The government says it will help regenerate the Vauxhall, Nine Elms, and Battersea areas, and the railway line and new stations will support 25,000 new jobs and 20,000 new homes.

Housing shortage

A Housing White Paper presented to Parliament in 2017 noted that since the 1970s, an average of 160,000 new homes have been built in England annually. However, the government says that more than 225,000 to 275,000 new homes need to be built each year to keep up with population growth, as well as to start tackling the underlying undersupply.

The ratio of new demand to new supply of homes in London hit 9.4 in February this year, and is the highest monthly figure on record

In London, 50,000 to 66,000 new homes need to be built each year to cater to the expanding households already in the city, as well as new households moving into the city for work. “London supplies on average 20,000 to 25,000 new homes per year, so there is a huge shortfall,” says Lim. “This chronic undersupply is going to be supportive of rental demand, especially in the centre of London.”

The ratio of new demand to new supply hit 9.4 in February this year, and is the highest monthly figure on record. Pent-up demand is forming in the city’s prime residential market, but buyers are waiting for greater political clarity before making their purchases. “The ratio of new prospective buyers to homes available is at its highest level in four years,” says Patrick Gower, residential research associate at Knight Frank UK.

Entrenched global city

London remains an entrenched global city for financial and other economic activities. While the political backdrop remains volatile at the moment, record high levels of employment underline the resilience of the UK economy, says Tom Bill, head of London residential research at Knight Frank.

He says that estimates of how many finance jobs would leave London as a result of Brexit have been revised downwards. This will be more than compensated for by the arrival of new employees into the technology sector, which will underpin future demand for prime London property, Bill adds.

The current Brexit crisis appears to be a time of opportunity for some international property investors.

“The weak sterling is attracting interest from overseas buyers, with the effective discount in dollar terms at about 25% when compared to [property prices] in 2015,” according to Knight Frank UK’s Gower.

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