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THE VIEW FROM LONDON - DECEMBER 2018

18/12/2018, London,UK

THE VIEW FROM LONDON - DECEMBER 2018

BREXIT and The London Residential Markets: The real estate specialist’s view

It has been 2 years since the Brexit referendum's surprise result and intensive negotiations between the UK and the EU are coming to an end. The proposed exit agreements have been approved by the EU and and are being processed by the UK Parliament.

Given that the EU has agreed the UK’s exit proposals and that Prime Minister May has successfully reasserted her authority, few doubt that the UK will not be exiting the EU for once and for all on 29 March 2019.

Most of the early "disaster scenarios" that were proposed regarding Brexit's future impact on the London real estate markets have proven unfounded:

For instance, it was initially feared that demand might fall in a small number of specific PCL and POL markets, that are particularly popular with ex-patriot EU populations. A much-quoted example of such a market was South Kensington, which has long been popular with French buyers, due to its French School.

South Kensington recently underperformed PCL, but this cannot be blamed on Brexit alone: The area contains some of London's most expensive homes which were particularly vulnerable to Stamp Duty increases. South Kensington's underperformance commenced with the 2015 onset of the tax-change-induced PCL Correction, not the later, 2016 Brexit referendum:

House prices in South Kensington

Fears that entire Banks (and their employees) might move out of London have also subsided. This was initially feared because certain PCL markets are particularly popular with City workers.

In 2017 the UK government reported that 0.48m people were employed in the City of London, representing 9% of London's employment. After the 2016 Brexit referendum, consultancy firm Oliver Wyman, forecast the loss of up to 75,000 jobs in the City, sending a surge of fear and uncertainty through many who might be negativly affacted by the possible layoffs. However, by September 2017, the City of London Corporation had reduced this estimate to between 5,000 and 13,000 jobs, a drastic change from the Wyman’s dramatic forecast.

While it is true that for legal reasons, following Brexit, some Banks and markets who have been using London as their EU Head Offices, will have to transfer this function to locations still within the EU, the effect so far has been much less drastic than anticipated.

According to Bloomberg, the latest estimates for such job transfers are as follows:

Previous Estimates

The types of disruption that might arise, were the UK and the EU to fail to implement necessary legislation in time for the final transition date, are mainly short term and involve temporary customs and freight or supply chain delays. Analysts do not believe that these short term issues will significantly impact the PCL and POL residential real estate markets, in the longer term.

Some specific PCL markets are strengthening irrespective of Brexit: For example, Bayswater was one of the very first PCL markets to fall following the Stamp Duty increases. Rather than permanently scare purchasers away, the 2015/2016 price falls in Bayswater, made new investors look at re-priced opportunities in the area, which was rapidly improving, due to Crossrail and the Queensway, Paddington Basin and Whitelys developments.

Brexit is not scaring investors away from good opportunities in rapidly improving parts of London and QIB’s London Real Estate specialists are well positioned to assist clients seeking properties in such areas.

As a broader indication of how Brexit may have, or have not, affected PCL investment patterns, one can refer to Hamptons’ Feb 2018 survey. This survey found that the proportion of homes sold to international buyers in PCL increased to 55% in H2 2017, up 8% on H1 2017 and up 16% on H2 2016 (following the Brexit vote). This was the highest proportion of international buyers in PCL since H2 2012 (58%).

Hamptons found that the rise was mainly due to a pickup in Middle Eastern and Asian buyers, who bought 15% of homes in PCL in H2 2017, up 5% on the previous half. Some new developments, like Paddington Basin, proved especially popular during this period – and continue to do so.

Buyers from Asia continued to take advantage of the depreciation in the value of Sterling’s and the proportion of sales to Asian buyers in PCL rose from 9% in H1 2016 to 16% in H2 2017.

For EU buyers, even though they still made up the second biggest group of international buyers in PCL, their share of purchases had unsurprisingly decreased since the Brexit vote in June 2016 and the proportion of homes bought by them fell from 23% in H1 2016 (pre-Brexit vote) to 10% in H1 & H2 2017.

The chart below shows the changes in propotional property purchases by the groups mentioned above (EU, Middle East, Asia, and International):

Changes in proportional property

Moreover, London prime residential real estate specialists, Savills, recently forecast the Prime Central London market’s medium term performance, on the basis that Brexit completes on a “soft” (or mutually agreed) basis:

Savills

London Real Estate Specialists

As the Brexit negotiations close, the number of investors considering London residential investment opportunities is likely to once again increase. The complex interactions between macro-level, geopolitical and economic trends (such as Brexit) and intensely local, sub-market drivers, can make the PCL market difficult to interpret from afar. There is no single London real estate market, or even, Prime Central London market. London comprises a large number of smaller, distinct sub-markets, within which no two streets or buildings perform identically. In order to work through these facts and make the best investment decisions, QIB’s London Real Estate specialists have valuable, extensive, local market experience and are ideally situated to assist any Qatari individual or organization during their search for their ideal London property.

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