Coutts London Prime Property Index | Q3 2019

Recent flurry of activity in what has been a flat few years

Despite Brexit woes, sales activity was up 10.3% compared to the previous quarter. Quarterly sales were the highest we’ve seen since the end of 2017. This suggests that patience may be running out for sellers who have been holding off in the hope of a recovery in prices, with buyers snapping up properties at attractive prices. This has been particularly true for foreign buyers who have the added advantage of a weak pound.

But market activity remains well below peak levels, with sales volumes 27.8% down on 2013. The last three months have seen a particularly acute slowdown in the £5 million plus market, possibly due in part to potential stamp duty changes that would reduce the top rate from 12% to 7% - a substantial saving on a £5 million property for those who wait, should the proposal ever see the light of day.

Low stock driving buyers off-market

New instructions also remain low, -10.5% down on last year and -45.2% below the 2014 peak, making it a challenge to find new stock. Increasingly, this is driving buyers to other, creative ways of finding their ‘dream property’, often using a buying agent with access to properties that may not be on the open market.

The off-market pool of property can include pre-market opportunities that have yet to be formally put up for sale, and properties where a seller has instructed an agent to market the property discretely. Sellers can choose to go down this route for a variety of reasons, for example to avoid ‘date-stamping’ a property for fear it could become ‘stale’ if it fails to sell promptly. And truly off-market opportunities can come from direct approaches to a developer or property owner, or someone on their team such as an architect, solicitor or bank.

Converging price expectations see narrowing discounts

The average discount on asking price across London continues to fall, suggesting that buyers and sellers are arriving at a consensus on valuation levels. The average discount now stands at -10.3%, the lowest figure we’ve seen over the last eight consecutive quarters.

The largest discounts are being negotiated on higher value properties with an average -15.2% coming off the asking price for super prime properties (£10 million plus). This would indicate there is a significant mismatch between the expectations of sellers and the prices that buyers are willing to pay at this high end of the market. This is perhaps driven by the lower turnover of properties at this rarefied level: the more active markets provide a greater level of market intelligence, helping sellers set prices.

For super-prime properties there’s always going to be an element of guess work on what the market will pay, and many properties at this level can have unique qualities that make comparisons difficult. In these circumstances, perhaps sellers reason that pitching the price higher provides the property with more caché while potentially tilting the final price up.

Just under half (47.0%) of properties are sold at a discount to the asking price. Gross rental yields remain unchanged, at 3.9% on average across prime London markets. This is a relatively low income compared to other investments – the FTSE 100 currently yields 4.5% - although it can be helpful to diversify income streams to offset volatility in other markets.

Have we reached rock bottom?

The two biggest risk factors we’ve seen for property investment have been rising taxes that can impact potential gains and ongoing uncertainty surrounding Brexit. While the 3% surcharge for investment property is likely to remain in place, there are now reasons for optimism regarding a potential bottoming of the market.

Firstly, we expect Brexit to be resolved over the coming months, likely with a deal. Should this happen, we believe that overseas investors could be encouraged back to the UK market, attracted by very low sterling exchange rates that make UK properties a particular bargain for the non-sterling buyer.

Additionally, there is evidence to support our ‘low for longer’ view on interest rates. In the US, a bellwether for global markets, short-term rates have peaked already at below 3%, indicating that the global structure of rates is much lower than previously thought. We believe that this low global interest rate structure could be a key long-term support for real estate.