In the hours and days following the UK referendum, in which 51.9% of voters elected to exit the European Union, much of the country looked on in shock. The campaign had been a bitter and visceral one, driven by inciting rhetoric around British immigration, the economy and the bureaucratic elite, but many inside Britain and abroad did not expect the leave vote to prevail.
As the world grappled with the results, the markets reacted on a scale not seen since the financial crisis. The pound plunged to the lowest since 1985, Asian stocks tumbled and just days later news came out that Standard & Poor’s had stripped Britain of its triple-A credit rating. The vote has set the nation up for bitter divorce talks ahead, and, since there is no precedent for a country leaving the 28-member-state EU trade block, uncertainty reigns over how exactly the UK will negotiate its new position within the political and economic landscape.
This uncertainty has already affected the property market, particularly in London where some buyers have been pulling out of purchases, concerned about the city’s future. The UK Treasury warned before the vote that residential property prices would be as much as 18% lower if the country voted to leave. Howard Archer, chief European and UK economist at IHS Economics said housing market activity and prices were at “very serious risk of an extended, marked downturn following the UK’s decision to leave” the European Union. He predicts home prices could fall 5% in the second half of 2016 and a further 5% in 2017.
“The vote in favor of Brexit will generate a period of renewed uncertainty in the prime London residential market”, said Liam Bailey, global head of research at Knight Frank in London. “Some demand, especially from investors, will be delayed and in some cases redirected”.
Brexit presents renewed uncertainty following a string of events that have already dampened London’s property market. From 2009 to 2014, London repeatedly made headlines for record-breaking sales of super prime mansions to wealthy buyers from Russia, the Middle East and Asia, many of them in the city’s central neighborhoods, the so-called ‘golden postcodes’ that include Belgravia, Knightsbridge, Kensington, Mayfair and Holland Park. However, since 2014, the market has slowed.
Some of the headwinds have come in the form of taxes. A new stamp duty rate, introduced in December 2014, charges 10% on properties worth over GBP 925,000 ($1.3 million) and 12% on those over GBP 1.5 million ($2.5 million). As of April this year, buyers of second homes and buy-to-let properties face another tax; a 3% stamp duty surcharge intended to level the field between investors and first-time buyers.
The effect of the new stamp duty rates was already being felt in the market, with far fewer transactions recorded in the $2 million plus range. Then, the Brexit campaign gave buyers and sellers further pause. “Buyers and sellers postponed decisions because of the prospect of entering unchartered economic and political territory,” says Tom Bill, Head of London Residential Research at Knight Frank. According Knight Frank data, demand remained subdued in May 2016 even for properties where asking prices had fallen by 10% or more.
In a city that draws significant investment from international markets, local political upheavals are only part of the puzzle. Over the past year, major foreign investors in British property have been hit with their own setbacks: low oil prices in the Middle East, currency problems in Russia, a recession in Brazil and stock market turmoil in China, all of which have contributed to few high-end transactions. In 2014, Mideast investors made up 15% of prime central London buyers; in 2015 they made up 4%.
According to Yolande Barnes, Head of World Research at Savills, the Brexit campaign became a convenient excuse for a slowdown in the market that was already occurring. Savills figures show prices in prime central London dropped 6% in 2015, and deal volumes shrank have as much as 40%. “Brexit has been a very good excuse for people not to do anything in a market where people wouldn’t have done anything anyway”, Barnes says.
Nevertheless, the unexpected referendum outcome has added another, greater hurdle to a market that was still adjusting to stamp duties and global geopolitical factors. “The prime London property market would benefit from something that appears unlikely in the near-term: an uneventful six months”, says Knight Frank’s Tom Bill.
For some foreign investors, however, the current turmoil represents an opportunity. Buyers will get increased value in purchasing London properties as a result of a depreciating sterling, says Peter Wetherell, a Mayfair-based broker. “For overseas buyers, this big and dramatic drop in the value of sterling will effectively offset the Stamp Duty and tax adjustments and it will make prime London property a lucrative investment for overseas investors bold enough to take a punt despite the market uncertainty”.
For many who believe in London’s long-term resilience, the current market disruptions do not change the overall attractiveness of the city, particularly as a haven for wealth preservation. Research from Knight Frank shows that over the last decade the city has drawn more than twice the number of High Net Worth Individuals from emerging markets (114,000) than the US and Australia combined (42,000 and 22,000 respectively). Investors are drawn by the city’s safety, good schools, green environment and central time zone, factors unlikely to change as a result of the Brexit vote.
The city is also actively investing in the future. A wider look at the real estate market also reveals that while demand for Prime Central London property has fallen in recent years, there has been an uptick in interest around greater London, where regeneration schemes and renewed connectivity and infrastructure projects are shifting the landscape of luxury living.
“As the golden postcodes of London became less affordable after the financial crisis, buyers have increasingly looked for better value further afield”, Tom Bill says. Though they are looking for better value they still want “best-in-class specifications and facilities”, and this means there is a growing focus on the quality of schemes rather than a desire to be in a specific area.
Developers have tapped into this demand, and it is raising the overall level of quality of new-build developments, which increasingly incorporate amenity packages, services, commercial and cultural components. While such experiments in urbanism and place making are common in cities like Miami, Hong Kong or Singapore, they are a relatively new phenomenon in London.
Southbank, one of the first areas to be revitalized, was not previously on the map for wealthy investors, but has experienced a faster rate of growth compared to other prime neighborhoods and serves as an example of how new markets can mature, says Tom Bill.
In addition to The Shard (the tallest building in Western Europe), the area is the site of More London, master planned by Foster + Partners, and One Tower Bridge, a project from Berkeley Homes that combines luxury residences with shops, restaurants, pedestrian walkways and a lively riverfront park. In addition to its cultural offerings, The Ivy, a popular London brasserie recently announced plans to open a ground floor location at One Tower Bridge, and The London Theatre will soon occupy the development’s 900-seat sunken theater. The scheme itself incorporates significant space to outdoor living, also a novelty for London. “What is really special about this project is the amount of dynamic terrace and roof space, along with outdoor kitchens, hot tubs and gazebos”, says Murray Levinson, a partner at Squire & Partners who designed the project.
From the top of the Tower Penthouse, which comes complete with a roof terrace and hot tub, you can see the across the Thames to the city of London, the Tower Bridge, Tower of London and beyond. The lower-rise buildings, positioned facing the river, feature sliding glass doors that open onto wide terraces with views of City Hall and Tower Bridge. The views have been a strong selling point for the project, which is currently 90% sold. The quality of construction (interiors feature handcrafted joinery, polished marble worktops, Miele appliances and home automation systems), has also been a draw, as has the amenities package: 24-hour concierge service from Harrods Estates, a gym, spa and indoor pool are included. Roughly 23 units remain, including select penthouses. These are priced around $3,900 per square foot.
The mixed-use concept is also proliferating in greater London with schemes such as Nine Elms slated to include 20,000 new homes, and further west, White City, which is the site of a $10 billion overhaul that aims to transform the area from a stark, largely commercial landscape into a lively neighborhood with 5,000 new homes, shops and an office hub for media related companies. As part of the revival, London developer Stanhope is converting the former BBC headquarters into luxury residences.
To the east, tall towers are also multiplying in a city that was once defined by a more uniform, low-scale urbanism. At Canary Wharf, Herzog & de Meuron has designed a new tower nicknamed the Rolling Pin because of its tall cylindrical shape, and Foster + Partners have designed South Quay Plaza, the tallest residential project currently under construction in the EU.
Historically a busy port, and more recently the site of a burgeoning financial district, Canary Wharf is also becoming an increasingly coveted place to live. Expectations for future growth are bolstered by the arrival of the new Crossrail Line, scheduled to run in 2018, which will significantly cut travel times to central London. Today the area still feels largely corporate, but developers intend to blend residential and commercial programs with increased connectivity as the community matures.
“Canary Wharf is becoming more mixed-use and will grow to a population of 200,000,” says Harry Lewis, Managing Director of Berkeley Homes who is developing South Quay Plaza. “Rental yields are higher here, and the arrival of the Crossrail will be a game-changer.”
South Quay Plaza is situated on the waterfront directly opposite the CBD and though many of the adjacent buildings are built right to the edge of the shoreline, Grant Brooker, Head of Studio at Foster + Partners wanted to approach the site differently. “It’s important to let daylight through”, he says, explaining that by skewing the cube-shaped towers, which have a relatively small footprint (over 64% of the site will not be developed), he was able to create many more exposures. “The building doesn’t have a rear side”, he says. “Every unit has fantastic frontage”.
Brooker’s team also uses their extensive experience designing buildings internationally to create a comprehensive amenities program, which features a health club, spa and 20-meter pool, and a residents’ club lounge that spans the entire 56th floor and includes a bar, screening room and a large terrace. “The type of amenity that is required for a building to really work was missing in earlier developments in London”, Brooker says.
Scheduled for occupation starting in 2020, South Quay Plaza will include 888 units across the 36-storey and 68-storey towers ranging from studios to three-bedroom residences and penthouses. So far Berkeley Homes has released 350 units with prices starting from $990,000. To date, half of these units have sold, and demand from Asia has been strong: 50% of the project’s international buyers hail from China.
Adam Challis, Head of Residential Research at Jones Lang LaSalle says regeneration schemes such as Canary Wharf are particularly popular with Asian buyers because they understand the long-term investment potential. “They understand it because they have seen it happen in their own countries”, he says. Challis has also noted an overall shift in buyer attitude in recent years, wherein investors are taking the long view, looking carefully at programs, schemes and neighborhoods and approaching the decision as an investment in London as a whole.
Time will tell how Britain manages to negotiate its exit from the European Union, and how London fairs as a result of the changes. Much will depend on Brexit’s lasting implications for British businesses, particularly those in the country’s enormous financial sector. Before the referendum, London’s population was projected to grow by 100,000 people a year for the next decade and housing supply was lagging. For those who believe in the city’s future and continued potential for growth, now might be an opportune time to take the plunge.
This article was first published in Palace Magazine.