Regardless of whom you read, Brexit is having a negative impact on central London housing. An October 17 European Union summit was presaged by European Council president Donald Tusk saying yesterday there is “no grounds for optimism” given the state of negotiations. Coupled with fresh inflation data, the pound was down again. Since the Brexit vote, the pound has almost exclusively traded +/-$1.30 where as it typically had ranged in the $1.50-$1.60 range previously.
Adding to the stress, in early October, two more large financial institutions announced plans to shift some London operations to Paris with whispers of more to follow. Financial services is one of the largest employers in London as well as one of the highest paid. Removing significant quantities of high earners will cause a glut in some price bands as relocated staff sell up for Gay Purr-ee.
During my London holiday, I was able to meet with a host of HGTV’s House Hunters International, Richard Blanco. A Spanish national growing up in the UK, Blanco was schooled in theater and dance – a story common to many real estate professionals whose early interests gave way to a profession in property. So far Blanco has chalked up over 30 House Hunters International episodes, including being the only presenter to work in multiple countries (eagle eyes have seen him in Spanish episodes). He’s currently a spokesperson for the UK’s National Landlords Association and is a regular commentator on various television shows – in fact, Blanco had popped into the BBC earlier in the day. For those wanting a regular dose of the London property market, Blanco produces a monthly podcast Inside Property. In his spare time, Blanco flips homes he buys at auction.
Taxes and Unexplained Wealth
During our first meeting at Yauatcha in Soho, we discussed how new taxes are also to blame for an overall softening in international buyers. That week it was announced that the government was planning an additional stamp tax on foreign buyers of up to 3 percent of a property’s purchase price. This is on top of the existing Stamp Duty Land Tax, which is a sliding scale from zero for properties under £125,000 (a nice home in some parts of the country or a parking space in central London) that tops out at 12 percent on properties over £1,500,000. In addition to this is an added 3 percent for second (investment) home purchasers. In the UK, condominiums are leasehold (or shared fee simple) and the same rates of tax on land are due on condo purchases.
If taxes and Brexit weren’t enough, the UK has racked up a win in the first case involving legislation aimed at cracking down on the country’s status as an international money laundering haven – estimated by some at £90 billion. In January 2018, the Unexplained Wealth Order came into force and quickly targeted Zamira Hajiyeva, an Azerbaijani banker’s wife with £22 million in real estate and a decade-long £1.6 million per year Harrods spending habit. Her husband is currently in jail for 15 years for defrauding the state bank of up to £2.2 billion. Hajiyeva is (of course) appealing the ruling.
Unexplained Wealth Orders enable the government to force suspects to show where they got the money, something organized crime, fraudsters and money launderers can’t do without incriminating themselves. If they can’t bear the burden of proof, assets are seized by the government. Shouldn’t every country have taxmen chasing these people? Since tax cheats (thieves) and money launderers tend to buy expensive properties, Blanco noted that a certain segment of real estate is holding its breath.
For all these reasons, prices for high-end properties have been sliding since 2014 and are currently down 15 percent from those highs. The 2014 peak is not a coincidence. It was the same year the Stamp Duty rules began to change with the added 3 percent second-home tax hitting in 2016, months before the Brexit vote.
Uncertainty is never a friend to real estate. As Brexit rolls on with heated battles on all fronts between Europe and factions within the UK government, markets are regularly jittered by talk of a currency devaluation, recession, and inflation coupled with high interest rates. It doesn’t help with regular whipsawing between “hard” and “soft” Brexit deals cracking through the news.
For foreign homebuyers, especially those with eyes on London, Blanco says this is the time to sit and wait. Regardless of the pound trading at $1.28 last week, the outcome of Brexit has far too much downside than upside. Especially when combined with the increased tax burden for foreign buyers.
Further highlighting the issues in London, Britain’s largest mortgage lender, Nationwide, reported in early October that UK home prices are slated to rise by 2 percent in 2018. But while the rest of the UK is seeing solid growth, London and its metro area saw drops in September of 0.7 percent and 0.3 percent respectively, while large swathes of the north saw increases in the mid-4 percent range. With five consecutive quarters of declines, London is dragging down the rest of the UK.
Blanco says it’s not unusual for the greater London area in the south and the north of the UK to be going in opposite directions. “Every 10 years there seems to be a switch” between the two areas said Blanco.
But putting London into perspective, prices are still 50 percent higher than before the Recession and have only declined by 3 percent since their record highs in early 2017. So even with the currency drop and the doom and gloom being painted, it’s still no time for foreigners to buy in London.
Just like in the US, the UK is also experiencing increasing interest rates coupled with stagnant wage growth that, balanced against inflation, combine to bring down the purchase power of buyers.
Builders and Battersea
The added tax on foreign buyers hit homebuilders, particularly those with significant London focus. After the new tax was unveiled, homebuilders Berkeley, Taylor Wimpy, Barrett Developments, and Bovis were all trading lower. Berkley is particularly exposed, with estimates that 70 percent of its projects are in London and half of its buyers foreign nationals.
The 42-acre Battersea Power Station project, new home to the American Embassy, future home to Apple’s UK headquarters, and thousands of apartments and condos, is suffering. Once a beacon of the power of London development, the project has been hit by scandal and cost overruns. The drop in the pound has increased raw material costs and led to the decrease of an already low affordable housing component from 636 to 386 units.
The project is also embroiled in the Malaysian government corruption scandal (1MDB) as the project passed into and between Malay hands in 2012 and 2018. The new government is trying to unravel and recoup losses from billions in suspect financial dealings by the prior government.
The combination of rising costs, potential financial irregularities unraveling the deal, and the potential negative outcome of Brexit, and the project is not one Blanco is recommending to buyers.
The question is whether Battersea’s circumstances are a unique combination or a harbinger of troubled times ahead in London’s new construction market. Certainly, when seen through the lens of London builders already losing ground and the overall market losing steam, it does not bode well in the near- to mid-term.
For second-home buyers with cash, the declining market is good news, but I don’t believe the news is good enough yet to buy. A clear signal on Brexit is required before placing a risky, and ultimately discretionary, purchase.
If the UK government gets Brexit wrong and damages the economy, the result could be very swift for the property market if unemployment rises along with the rest of the Pandora’s Box of Brexit fears.
But however good a bad Brexit might be for investors and homebuyers, the overall damage and its resulting misery is in no way worth it. Unless an extension is agreed to, the official Brexit separation is scheduled for March 29, 2019. Maybe I should ask Blanco to pencil me in for dinner the following day?
Remember: When I’m not stirring up trouble in Dallas, Texas or Honolulu, Hawaii for Candysdirt.com and SecondShelters.com, I’m off scouting interesting locations for a second home. In 2016, 2017 and 2018, the National Association of Real Estate Editors recognized my writing with three Bronze (2016, 2017, 2018) and two Silver (2016, 2017) awards. If you’re a Realtor with second home clients who’d like me to feature their journey, shoot me an email email@example.com. Be sure to look for me on Facebook and Twitter. You won’t find me, but you’re welcome to look.