london prime residential property market report winter

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London Prime Residential Property Market ReportWinter 2016-2017

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London Prime Residential Property Market Report – Winter 2016-2017

Supply and demand

Sales market: Key trends – Signs that capital values are stabilising coming into 2017 – 19% increase in exchanges in December as buyers react to price corrections – Overseas buyers exercising caution despite currency benefits – New homes sales slowed in 2016 but average prices rose

London’s property market proved surprisingly resilient over 2016 as a whole, especially considering the turbulence created by the stamp duty surcharge introduced in April and the EU referendum result in June. The final quarter of the year is often slower due to Christmas and the run-up to the holidays and 2016 was no exception.

Exchanges over the quarter were also 3.4% lower (down 11% year on year) but there was an unusual yet encouraging pick-up in December, which saw a 19% increase compared to November and early signs that this momentum would be sustained in January. Another sign that January was set to be a strong month was that the number of properties available for sale at year-end was 18% higher than 2015.

Exchanges were driven by two key factors: firstly, price reductions which rose by 70% over the year and helped to compensate buyers for the increased stamp duty liability and the perceived “over-pricing” of many properties. Secondly, some buyers and sellers showed that they were no longer willing to wait for the fog to lift on Brexit and decided to commit to deals.

The pound fell by 17% against the dollar in 2016, but despite the discount that this offered foreign buyers, the anticipated surge in overseas buyer activity did not materialise. This suggests that even with the effective discount being offered by the weak pound, foreign purchasers are just as price sensitive as UK buyers and similarly inclined to look outside central London for better value opportunities. There was also an element of concern about Brexit and what that might mean for their investments in the shorter term. This had a considerable impact on the prime central locations where transactions in 2016 in some areas were down by over one third.

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-0.35-0.30-0.25-0.20-0.15-0.10-0.050.00

ExchangesFallthroughs

Pricereductions

ViewingsApplicantsAvailableproperties

InstructionsMarketappraisals

-15.3% -16.3%

-3.4%-0.2%

-9.6%-24.1%

-1.1%-7.6%

-20%-10%

0%10%20%30%40%50%60%70%80%

ExchangesFallthroughs

Pricereductions

ViewingsApplicantsAvailableproperties

InstructionsMarketappraisals

-11.1%

18.2%14.8%

4.0%-9.3%

-9.1%

70.1%

5.6%

Source: Chestertons Research


Key market indicators: Q4 2016 v Q3 2016

Key market indicators: 2016 v 2015

New homes market2016 proved a turning point in the cycle of the new homes sector with the number of annual sales falling for the first time in eight years. Sales across London fell by 22% in 2016, while the number of PRS (private rented sector) units sold dropped by 35.5%. By the end of the year, the ratio of unsold units under construction had risen to 42% from 37% at end-2015.

Although the number of construction starts fell by 28% in 2016, completions rose by 39%. The supply overhang rose and by the end of the year 26,200 units (both completed and under construction) were unsold – an increase of 17% compared to one year earlier. The development pipeline is also significant. Molior estimates that the 162,359 units with consent but where construction had not started at end-2016 would take 7.8 years to sell assuming 2016 sales rates, up from six years at end-2015.

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Buyers have become increasingly price sensitive over the past year, and properties in the sub-£1,000 per sq ft (psf) bracket are attracting the most interest. However, some of the more expensive developments also reported healthy sales at prices above this level and Molior data reveals that sales of schemes with an average price of more than £1,500 psf increased by 9% in 2016.

During 2016 the average asking price for a new build property in London was £883 psf - £653 psf in outer London and £1,345 psf in Inner London - which is 7% higher than 2015. Unsurprisingly, the most expensive boroughs were in central London: Westminster at around £2,100 psf, Kensington & Chelsea at £1,700 psf and the City of London at £1,700 psf. Some individual schemes achieved considerably more than this with £5,000 psf the highest average recorded in Mayfair.

0

5000

10000

15000

20000

25000

30000

35000

40000

20162015201420132012201120102009

Starts Completions Sales

0

5000

10000

15000

20000

25000

30000

20162015201420132012201120102009

Unsold u/c Unsold complete

Source: Molior

Source: Molior

London new homes’ starts, completions & sales: 2009-2016

London new homes’ unsold (under construction) & unsold (completed) at year-end

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Property valuesAlthough the number of price reductions dropped by 8% compared to the previous quarter, capital values in the prime London locations nonetheless continued to drift downwards by 0.6% during the final quarter of 2016, giving a total decline of 5.1% across the year. It is worth noting that the rate of decline slowed noticeably in the final quarter, which could suggest that the market is close to bottoming out.

The usual variation between submarkets was apparent: St. John’s Wood (-8.6%), Hampstead (-8.2%) and Mayfair (-7.5%) recorded the sharpest annual decline in 2016 while Tower Bridge (+3.9%), Kentish Town (+1.1%) and Wandsworth (+0.2%) saw some increase in prices.

High stamp duty rates continued to influence buyer offers while the increased availability of properties for sale, plus the drop in applicants, strengthened the negotiating power of those purchasers prepared to act.

Higher-priced properties were the most affected by price reductions, which largely explains why the proportion of sales in the higher price bands rose in Q4 with sales in the £1.5m-£1.99m price bracket accounting for 14% of total sales in Q4 compared to 10% in Q3, while the share of properties of £2m and above rose from 6.4% to 7.7%.

Price growth in the wider London market began slowing from the end of Q2 2016 but nonetheless remained robust over the year as a whole. The Land Registry reported annual growth for 2016 of 7.5%, down from 12.4% in 2015, which suggests that while low interest rates combined with insufficient supply continued to drive price growth, affordability is reducing the number of buyers. Indeed, sales in the first 10 months of 2016 were 26% lower than in the same period in 2015.

less than £500,000

£500,000 – £749,999

£750,000 – £999,999

£1m – £1.499m

£1.5m – £1.999m

£2m and above

14.0%

12.6%

14.5%

31.4%

19.8%7.7%


Exchanges by price band: Q4 2016

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Outlook2017 has the potential to give us as many surprises as last year, with Article 50 due to be triggered, key elections in Germany, France and the Netherlands and Donald Trump in the White House. For now, there have been encouraging signs for London’s sales market in the first six weeks of the New Year with exchanges and the number of available properties both up on the corresponding period last year. Whilst this is very early days, there is a feeling that pent up buyer demand is being released when vendors market their properties at realistic asking prices.

Buyers are showing signs of becoming weary of Brexit speculation and putting key decisions on hold, and although the higher rates of stamp duty remain an obstacle, deals are being agreed. There is of course a long and potentially painful road to travel until the UK leaves the EU and confidence could be shaken again as it was in the immediate post referendum period. Meanwhile, the economy continues to outperform the government’s pre-referendum forecasts and remains one of the strongest in the developed world, with employment at a record high and GDP growth in 2016 higher than the OECD and EU averages.

Even though the rate of decline in London property values slowed in the final quarter of 2016, the uncertainties going forward regarding Brexit and the global impact of President Trump could destabilise the market. However, in a press interview in early January the then President-Elect Mr. Trump said he thought Brexit was a good thing and that the UK would be at the head of the queue with regard to trade deals with the US. Moreover, the EU’s ongoing economic and banking woes plus several key elections this year could trigger flight capital into the UK.

On balance, we anticipate a further slight decline in prime London values in 2017 with a return to modest growth in 2018. The wider London market is already slowing and if interest rates creep up this will act as a further brake on price growth. We predict growth of around 5% this year slowing slightly the following year.

2017 2018 2019 2020 20212017–21

total compounded growth

London 5.0% 4.0% 4.0% 5.0% 5.0% 25.2%

Prime London -1.0% 2.0% 4.0% 4.0% 5.0% 14.7%

London residential price growth forecasts


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987-1.5%

TowerBridge

Hampstead7780.0%

Kentish Town853

-1.0%

1,158-2.4%

Covent Garden

Mayfair

Knightsbridge& Belgravia

Camden

Kensington

Little Venice

Fulham

Putney

Chelsea &South Kensington

Chiswick7544.1%

728-0.2%

Wandsworth7150.6%

733-0.5% East Sheen

8000.0% Richmond

7980.2%

1,333-2.8%

8760.0%

To Canary Wharf

871-2.7% Kew

BatterseaPark

982-2.25%

976-1.3% Barnes

1,506-2.0%

St John’s Wood

BatterseaRise

890-0.9%

Islington965

-1.8%

Westminster& Pimlico

HydePark

1,5300.6% 2,348-0.6%

2,447-0.2%1,5300.5%

1,312-2.5%

Notting Hill1,165-0.2%

1,598-2.0%

Canary Wharf& Docklands

7110.2%

Greenwich &Blackheath 634

0.4%

Prime residential capital values & 3-month growth as at end-Dec 2016


The Chestertons Prime London Residential Sales & Lettings Indices track quarterly changes in rental values in 27 locations across London. They are fixed-base indices using the quarterly repeat valuation of a standard basket of properties (selected so as to be representative of a typical cross-section of prime stock within each location) in order to remove inconsistencies that can arise from using a transaction-based approach where the number and type of properties may vary significantly between reporting periods. We have not applied any adjustment for seasonality or property mix. The geographical coverage of our indices is as follows: Barnes, Battersea Park, Battersea & Clapham, Camden, Canary Wharf, Chelsea & South Kensington, Chiswick, Covent Garden, East Sheen, Fulham, Greenwich & Blackheath, Hampstead, Hyde Park, Islington, Kensington, Kentish Town, Kew, Knightsbridge & Belgravia, Little Venice, Mayfair, Notting Hill, Putney, Richmond, St John’s Wood, Wandsworth, Westminster & Pimlico and Tower Bridge.

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Supply and demand

Lettings market: Key trends – Number of available rental properties 22% higher than 2015

– Tenants more cautious and price sensitive

– Further slide in rental values as stock levels remain high

– Investor interest steady despite political uncertainties

The last quarter is typically the quietest for London’s lettings market and 2016 was no exception, with most of the key indicators down by a substantial amount on Q3, with the low point reached in December. Aside from the expected seasonality, there was also a noticeable increase in caution from corporate tenants, reflecting concerns about the impact of Brexit and the high rents being demanded by many landlords in a market where the number of available rental properties was 22% higher than at the end of 2015. ARLA reported that demand for rental properties in December fell to its lowest level since January 2015.

The number of tenants renewing their tenancies in Q4 was around 30% less than the previous quarter suggesting that more tenants had found better deals elsewhere or, in a few cases, taken advantage of cheap borrowing to acquire their own property. However, for 2016 as a whole, renewals rose by 7%, which reflects a combination of tenants not wanting the disruption of having to find new accommodation and landlords being more flexible with regard to rents to avoid costly void periods.

Demand from tenants working in the tech sector remained strong, which compensated to some extent for the understandable hesitation among financial services workers and the seasonal drop off in student demand. London has become a magnet for the Technology, Media & Telecoms (TMT) sector in recent years and now employs 367,000 people in London – more than the London workforce employed within banking and finance (348,000). Leading this employment are firms like Apple who last year agreed the largest office letting in the West End for 20 years and Google who are developing a new 650,000 sq ft HQ office in King’s Cross. Facebook is due to recruit 500 new staff for when its new HQ in Fitzrovia opens this year – and Snapchat is planning to open a new HQ operation near to its existing premises in Soho.

London’s prime rental market is currently well-supplied so landlords are required to be flexible about rent expectations if they want to attract new tenants or retain existing ones and there are even a few examples of landlords offering rent-free periods for tenants taking longer contracts. Signs of affordability issues were also reflected in the rise in demand for flatshares as tenants combined budgets to allow them to rent better quality accommodation or move to more expensive locations.

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-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0.0

Availableproperties

Agreedlettings

Propertiesviewed

New applicantsInstructionsMarketappraisals

-24.6%

-3.3%

-34.5%

-52.7% -44.0%

-41.9%

-15%-10%

-5%0%

5%

10%

15%

20%

25%

Availableproperties

Agreedlettings

Propertiesviewed

New applicantsInstructionsMarketappraisals

-11.8%

8.7%11.2% 11.1%

16.5% 21.9%



Key market indicators: Q4 2016 v. Q3 2016

Key market indicators: 2016 v. 2015

Rents and yieldsAlthough reducing over the final quarter of 2016, the still high number of properties available to rent meant that it remained a tenants’ market and rental values came under downwards pressure in many locations. The Chestertons Prime London Residential Rental Index recorded a fall of 2.5% in rents over the quarter and an 8.5% drop over the entire year.

In prime central London, the decline was more pronounced at 11.7% over the full year and 4.4% compared to the previous quarter.

Rents on contracts renewed in Q4 were broadly flat compared to the previous quarter (+0.5% increase), but for 2016 as a whole a slight increase of 1.24% was recorded.

With rents declining more sharply than capital values, there was further slight downwards movement in yields in Q4 with the Chestertons’ basket recording a figure of 2.98% compared to 3.0% in the previous quarter. Prime central London yields also nudged down slightly from 2.75% to 2.7%.

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0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

Knightsbridge & BelgraviaHyde Park

MayfairLittle Venice

Chelsea & S KensingtonPCL average

BarnesKensington

Prime London average Tower Bridge

ChiswickWestminster & Pimlico

Battersea RisePutney

East SheenCovent Garden

KewBattersea Park

RichmondCamden

GreenwichWandsworthHampstead

FulhamIslington

St John's WoodNotting Hill

Kentish TownCanary Wharf


Prime London gross residential yields (at end-Dec 2016)

Despite the planned cut in tax relief on interest amounts on finance related costs for landlords and the more stringent lending requirements, investor interest in residential property remained high. The Council of Mortgage Lenders reports that gross buy-to-let lending increased in November to its highest monthly level since last April when the stamp duty surcharge for second properties was introduced.

However, over two thirds of these buy-to-let loans were re-mortgages rather than new purchases. Moreover, the number of loans for house purchase in the first 11 months of 2016 was 11% down on the corresponding period in 2015.

More dramatically, the number of loans between April and November 2016 was 44% down on the same period a year earlier, clearly illustrating the impact of the 3% stamp duty surcharge on BTL properties and the imminent loss of tax relief.

Institutional interest continued to gather momentum, although much of the activity was focussed on higher yielding opportunities in decentralised London locations or regional markets.

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OutlookIn addition to more strict mortgage requirements, landlords will face a further onslaught on their profits this year when the phasing out of the tax relief for finance related costs starts in April. By the tax year 2020/21, the current 100% allowance will disappear completely and only a 20% tax credit will be available.

This will hit additional and higher rate tax payers, who constitute the majority of landlords in London, particularly hard. A higher rate tax payer could see his net profit reduce by around two thirds and an additional rate payer could see his net profit plummet by up to 91%. However, a basic rate tax payer will see very little difference.

Example: current tax year: higher rate tax payer: (note for simplicity we have not included other allowable expenses in the calculations nor any other income):

Annual rent income £45,000

Finance related expenses £30,000

Tax relief on finance related expenses 100%

Taxable income after expenses allowances (i.e. profit) £15,000

Income tax due (@40%) £6,000

Net profit after tax £9,000

Example: tax year 2020/21: higher rate tax payer: (note for simplicity we have not included other allowable expenses in the calculations nor any other income):

Annual rent income £45,000

Finance related expenses £30,000

Taxable income after expenses allowances (i.e. profit) £45,000

Income tax due (@40%) £18,000

Minus 20% tax credit on finance related expenses £6,000

Net profit after tax £3,000

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How landlords will react is uncertain but some surveys suggest that many will either exit the sector completely or will increase rents. Either scenario would be bad news for the private rented sector as a whole, which is struggling to cope with rising tenant demand, undersupply (other than at the top end of the market) and increasingly unaffordable rents.

Another possible outcome is that landlords will transfer their properties into limited companies to minimise the impact of the new tax regime as they will pay corporation tax at a current rate of 20% which is expected to drop to 17% by 2020. Research from Kent Reliance reveals that in the first nine months of 2016, 100,000 limited company loans were taken out by landlords buying properties – double the number for the whole of 2015. The NLA is, however, recommending that landlords wait until after the budget before deciding to incorporate in case the Chancellor closes this loophole.

Political events could also have a major impact on the sector. In the event of a “hard” Brexit, financial services companies – a key source of rental demand – have threatened to relocate some of their back-office functions abroad. However, there is no other financial centre in Europe which matches the scale of London’s infrastructure or qualified labour pool and if it happens, the impact may not be as dramatic as feared.

Our forecast is for further decline in prime rental values this year, although less pronounced than last year, before a slight return to growth in 2018. We expect rental growth in the wider market will slow this year and remain reasonably steady at around 4% per annum over the medium term.

2017 2018 2019 2020 20212017-21

total (compounded) growth

London 4.0% 5.0% 5.0% 6.0% 6.0% 28.8%

Prime London -2.0% 3.0% 4.0% 4.0% 4.0% 13.5%

London private residential rental value forecast


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4930.0%

TowerBridge

Hampstead776

-2.9%Kentish Town

7160.25%

1,566-5.4%

Covent Garden

Mayfair

Knightsbridge& Belgravia

Camden

Kensington

Little Venice

Fulham

Putney

Chelsea &South Kensington

Chiswick617

-8.2%

621-1.0%

Wandsworth4562.9%

659-1.4% East Sheen

741-1.1% Richmond

7330.5%

1,115-6.1%

8663.5%

To Canary Wharf

7403.4% Kew 903

-2.3% Barnes

7061.1%

St John’s Wood

612-1.2%

BatterseaRise

BatterseaPark

6670.5%

Islington8040.0%

Westminster& Pimlico

HydePark

730-6.0% 1,692-1.6%

1,483-7.8%988

-7.8%650

-1.7%

Notting Hill827

-0.4%1,271-1.9%

Canary Wharf& Docklands

Greenwich &Blackheath

5883.3%

4620.0%

Prime London residential weekly rental values & 3-month growth as at end-Dec 2016

The Chestertons Prime London Residential Sales & Lettings Indices track quarterly changes in rental values in 27 locations across London. They are fixed-base indices and are based on the quarterly repeat valuation of a standard basket of properties (selected so as to be representative of the typical cross-section of prime stock within each location) in order to remove inconsistencies which can arise from using a transaction based approach where the number and type of properties may vary significantly between reporting periods. We have not applied any adjustment for seasonality or property mix. The geographical coverage of our indices is as follows: Barnes, Battersea Park, Battersea Rise, Camden, Canary Wharf, Chelsea & South Kensington, Chiswick, Covent Garden, East Sheen, Fulham, Greenwich, Hampstead, Hyde Park, Islington, Kensington, Kentish Town, Kew, Knightsbridge & Belgravia, Little Venice, Mayfair, Notting Hill, Pimlico, Putney, Richmond, St. John’s Wood, Wandsworth and Tower Bridge.


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The contents of this report are intended for the purpose of general information and should not be relied upon as the basis for decision taking on the part of the reader. Although every effort has been made to ensure the accuracy of the information contained within this report at the time of writing, no liability is accepted by Chesterton Global for any loss or damage resulting from its use. Reproduction of this report in whole or in part is not permitted without the prior written approval of Chesterton Global. February 2017.i, i In this report, we refer to ‘Prime London’, which covers the following areas: Barnes, Battersea, Belgravia, Clapham, Camden, Docklands, Chelsea, South Kensington, Chiswick, Covent Garden, East Sheen, Fulham, Greenwich, Hampstead, Hyde Park, Islington, Kensington, Kentish Town, Kew, Knightsbridge, Maida Vale, Mayfair, Notting Hill, Pimlico, Putney, Richmond, St. John’s Wood, Wandsworth and Tower Bridge.

Local Offices:

Nicholas BarnesHead of ResearchT: 020 3040 8406E: [email protected]

Richard DaviesHead of LettingsT: 020 3040 8244E: [email protected]

Guy GittinsHead of SalesT: 020 7594 4745E: [email protected]

ContactChestertons is the London and international residential property specialist that knows its business and markets like no one else and every year helps thousands of people buy, sell, let, rent and manage their homes and investments. With more than 30 offices across the capital, Chestertons has one of the largest networks in London, as well as a strong international presence around the globe.

BARNES Sales: 020 8748 8833 Lettings: 020 8748 7733 [email protected] [email protected]

BATTERSEA & CLAPHAM Sales: 020 7924 4400 Lettings: 020 7298 5630 [email protected] [email protected]

BATTERSEA PARK Sales: 020 3040 8700 [email protected] Lettings: 020 3040 8700 [email protected]

CAMDEN Sales: 020 7267 2053 Lettings: 020 7267 3574 [email protected] [email protected]

CANARY WHARF Sales: 020 7510 8310 Lettings: 020 7510 8310 [email protected] [email protected]

CHELSEA Sales: 020 7594 4740 Lettings: 020 7594 4750 [email protected] [email protected]

CHISWICK Sales: 020 8995 3443 Lettings: 020 8747 3133 [email protected] [email protected]

COVENT GARDEN Sales: 020 3040 8300 Lettings: 020 3040 8400 [email protected] lettings.covent [email protected]

EAST SHEEN Sales: 020 8104 0580 [email protected]

FULHAM, FULHAM ROAD Sales: 020 7384 9898 Lettings: 020 7384 9899 [email protected] [email protected]

FULHAM, MUNSTER ROAD Sales: 020 7384 9898 [email protected]

GREENWICH & BLACKHEATH Sales: 020 8104 7500 Lettings: 020 8104 7510 [email protected] [email protected]

HAMPSTEAD Sales: 020 7794 3311 Lettings: 020 7794 1125 [email protected] [email protected]

HYDE PARK Sales: 020 7298 5900 Lettings: 020 7298 5950 [email protected] [email protected]

ISLINGTON Sales: 020 7359 9777 Lettings: 020 7226 4221 [email protected] [email protected]

KENSINGTON Sales: 020 7937 7244 Lettings: 020 7937 7260 [email protected] [email protected]

KENSINGTON CHURCH STREET Sales: 020 7937 7244 Lettings: 020 3040 8446 [email protected] [email protected]

KENTISH TOWN Sales: 020 7267 1010 Lettings: 020 7267 1010 [email protected] [email protected]

KEW Sales: 020 8104 0340 Lettings: 020 8104 0340 [email protected] [email protected]

KNIGHTSBRIDGE Sales: 020 7235 8090 Lettings: 020 7235 3530 [email protected] [email protected]

LITTLE VENICE Sales: 020 7286 4632 Lettings: 020 7266 2369 [email protected] [email protected]

MARYLEBONE Sales: 020 8104 7550 Lettings: 020 8104 7555 [email protected] [email protected]

MAYFAIR Sales: 020 7629 4513 Lettings: 020 7288 8301 [email protected] [email protected]

NOTTING HILL Sales: 020 3040 8585 Lettings: 020 3040 8588 [email protected] [email protected]

NORTH BARNES Sales: 020 8748 8833 Lettings: 020 8748 7733 [email protected] [email protected]

PARSONS GREEN Sales: 020 7731 4448 Lettings: 020 7348 7777 [email protected] [email protected]

PUTNEY Sales: 020 8246 5959 Lettings: 020 8704 1000 [email protected] [email protected]

RICHMOND Sales: 020 3758 3222 Lettings: 020 3758 3333 [email protected] lettings.richmond @chestertons.com

SOUTH KENSINGTON Sales: 020 7589 1234 Lettings: 020 7589 1244 [email protected] [email protected]

ST JOHN’S WOOD Sales: 020 3040 8611 Lettings: 020 3040 8622 [email protected] [email protected]

TOWER BRIDGE Sales: 020 7357 7999 Lettings: 020 7357 6911 [email protected] [email protected]

WANDSWORTH Sales: 020 8104 7530 Lettings: 020 8104 7540 [email protected] [email protected]

WESTMINSTER & PIMLICO Sales: 020 3040 8201 Lettings: 020 3040 8220 [email protected] [email protected]

Reproduction of this document in whole or in part is not permitted without the prior written approval of Chestertons. February 2017

Notting Hill

Chiswick

Barnes

Mayfair

Knightsbridge & Belgravia

Westminster & PimlicoChelsea

KensingtonSouth Kensington

Hyde Park

Little Venice

Earls Court

St. John’s Wood

Kentish Town Hampstead

Covent Garden

IslingtonCamden & Primrose Hill

Battersea & Clapham

Battersea Park

Putney WandsworthEast Sheen

Kew

Tower Bridge Canary Wharf

Fulham

Greenwich & Blackheath

Marylebone

Parsons Green

Richmond

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london prime residential property market report winter

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