Prop­erty mar­ket: A mixed story

Financial Chronicle - - DEEP DIVE -

Of all the world’s lux­ury hous­ing mar­kets, none is as glob­ally con­nected as Lon­don, and the su­per-prime £10m+ mar­ket here pro­vides a cru­cial bell­wether for global prop­erty in­vest­ment trends.

This mar­ket has faced sig­nif­i­cant pres­sures in re­cent years. These include grow­ing po­lit­i­cal un­cer­tainty, in part as a re­sult of the Brexit vote and do­mes­tic elec­toral tur­moil, but also, more crit­i­cally, some sharp in­creases in tax­a­tion on high value prop­er­ties. A decade ago, the pur­chase of a £10m house would have at­tracted a stamp duty charge of £400,000. To­day, a sim­i­larly val­ued prop­erty would at­tract a charge of over £1.4m.

Un­sur­pris­ingly, these pres­sures have acted to slow the top of the Lon­don mar­ket. Prices have fallen by be­tween 10 per cent and 20 per cent over the past three years.

Sup­ply-side data points to an in­crease in choice for pur­chasers. Avail­able stock has in­creased by over a quar­ter in the past 12 months, with the num­ber of newly-avail­able prop­er­ties in­creas­ing by more than 30 per cent year-on-year over the most re­cent three-month pe­riod. De­mand-side data tells a more mixed story, with a year-on-year de­cline of just un­der a fifth in the num­ber of prospec­tive pur­chasers ac­tive in the mar­ket in the three months to the end of Au­gust. But while the num­ber of pur­chasers may have fallen, those that re­main in the mar­ket are more ac­tive.

Sales of prop­er­ties worth £10m+ in the three months to the end of July were 28 per cent higher than in the same pe­riod in 2017, ac­cord­ing to the most re­cent data avail­able. This was boosted by a re­mark­able rise in the num­ber of £20m+ trans­ac­tions, which more than dou­bled over the same pe­riod.

As to the ques­tion who is driv­ing this in­crease in ac­tiv­ity, the short an­swer is that buy­ers are as di­verse as ever. But some themes do emerge from data. Buy­ers from main­land China con­tinue to grow in num­ber, and their £10m+ mar­ket share has tre­bled to more than 8 per cent over the past three years. Buy­ers from the Mid­dle East have seen their mar­ket share rise from 11 per cent to 17 per cent over the same pe­riod, while Rus­sian buy­ers have held steady, tak­ing around 12 per cent of all sales. One stand­out trend has been the strength of do­mes­tic de­mand, with Bri­tish buy­ers tak­ing 38 per cent of all pur­chases: the high­est level for five years. The un­cer­tainty en­gen­dered by the Brexit process does not ap­pear to be hav­ing a sig­nif­i­cant damp­en­ing ef­fect on the at­trac­tions of Lon­don’s most ex­pen­sive prop­er­ties for lo­cal or global buy­ers.

Cen­tres of ex­cel­lence

One of the big­gest driv­ers for prime res­i­den­tial mar­kets glob­ally is the de­mand for in­ter­na­tional ed­u­ca­tion. Knight Frank es­ti­mates that a to­tal of £2 bil­lion each year is in­vested in Lon­don’s prime hous­ing mar­ket by par­ents look­ing to se­cure ac­com­mo­da­tion while their chil­dren are at school in the cap­i­tal.

Dur­ing the sum­mer of 2018, Key­stone Tu­tors sur­veyed over 130 ed­u­ca­tion con­sul­tants, head teach­ers, heads of ad­mis­sions, pri­vate client ad­vis­ers and re­lo­ca­tion agents to col­late data on global trends re­gard­ing in­de­pen­dent ed­u­ca­tion in the UK. The coun­tries with the great­est num­bers of chil­dren rep­re­sented among the in­sti­tu­tions tak­ing part in the sur­vey were Hong Kong, main­land China and Rus­sia.

The three great­est mo­ti­va­tions for clients send­ing their chil­dren to school in the UK were: qual­ity of ed­u­ca­tion (87 per cent of all re­spon­dents); pres­tige of school name – in­clud­ing per­ceived fu­ture em­ploy­ment prospects (67 per cent); and to im­prove their chil­dren’s chances of se­cur­ing a place at Oxbridge or other top UK uni­ver­si­ties (62 per cent). Other mo­ti­va­tions in­cluded prop­erty in­vest­ment and qual­ity of life, as well as the higher cost of school fees in other coun­tries.

Be­sides the UK, the most pop­u­lar choices of coun­tries to send chil­dren to for school were the US (men­tioned as an op­tion by 68 per cent of re­spon­dents), Canada (29 per cent), and EU coun­tries (29 per cent). Af­ter these, non-EU coun­tries such as Switzer­land are pop­u­lar choices. For univer­sity op­tions, the US leads with 86 per cent of re­spon­dents con­firm­ing it as an op­tion, fol­lowed by the UK, with Canada next (35 per cent), the rest of the EU (35 per cent) and Aus­tralia (20 per cent).

All change

In the anal­y­sis of the Prime In­ter­na­tional Res­i­den­tial In­dex (PIRI 100), pub­lished in The Wealth Re­port back in March, prime prices in Euro­pean cities were strength­en­ing, while Chi­nese cities were in gen­eral see­ing mod­er­ate growth in lux­ury res­i­den­tial prices. Six months on, a fo­cus on 20 of the cities within the PIRI 100 finds these trends per­sist­ing – and some new ones emerg­ing. As pre­vi­ously fore­cast, price growth is slow­ing at a global level. Across the 20 cities tracked, av­er­age prime prices rose by 6 per cent in the year to De­cem­ber 2017; by June 2018, this fig­ure had dipped to 4.2 per cent. With the cost of fi­nance set to rise in a num­ber of mar­kets, more strin­gent cool­ing mea­sures be­ing im­posed, and slower growth in China’s first-tier cities, lower price growth will char­ac­terise the over­all re­sults of the In­dex for some time to come. In­evitably, there are out­liers. Sin­ga­pore and Tokyo, for ex­am­ple, have seen a resur­gence in growth. In Sin­ga­pore, re­cov­ery is a con­se­quence of ris­ing for­eign de­mand and high land bids by devel­op­ers, which has fed through to new-build prices; in Tokyo, growth is linked to eco­nomic sen­ti­ment, the city’s rel­a­tive value com­pared with Hong Kong and Sin­ga­pore, and in­vest­ment ahead of the 2020 Olympic Games.

Madrid con­tin­ues to fly the flag for Europe, with prime prices up 10.3 per cent over a 12-month pe­riod. Ber­lin saw prices rise by 8.5 per cent, and Paris, where do­mes­tic buy­ers, buoyed by an im­proved econ­omy and cheap fi­nance, are in­vest­ing once more, saw prices ac­cel­er­ate 6 per cent.

US cities reg­is­tered pos­i­tive growth in the year to June, re­flect­ing the gen­eral health of the econ­omy, with Los An­ge­les lead­ing the pack at 7.8 per cent. In some cities, in­ven­tory lev­els are still ris­ing, and it is likely to be 2019 be­fore the full im­pact of Don­ald Trump’s State and Lo­cal Tax (SALT) reforms is known.

Buy­ers from main­land China con­tinue to grow in num­ber, and their £10m+ mar­ket share has tre­bled to more than 8 per cent over the past three years

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