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Clouds and Silver Linings – Spring 2016

January and February can be pretty gloomy at the best of times. This year has seen plunging financial markets and grey skies that are hardly conducive to a market with spring in its step – especially when it is still suffering from the attentions of a Chancellor whose reflex action when he sees a brick is to tax it. But there are silver linings.

First the clouds. Stamp duty has been the big headline. Just when you thought it was safe to go back into the water after the huge increases changes in SDLT that hit last year, George Osborne slapped on another 3% for good measure for second homes and buy-to-lets. The direction of travel is clear; buying good, renting bad – unless you happen to be rich; in which case it’s reversed. We have said for a long time that property is just too tempting a target for any government, particularly when its owners don’t vote and live elsewhere. For those overseas buyers, however, the levels of stamp duty are not that punitive on an international level: in Hong Kong or Switzerland the rate is pretty much the same. In New York it’s less – but you will find out about your fiscal responsibilities soon enough when you start to pay local and state taxes. This does raise the point that if the government is keen on creating a property-owning economy, then keeping the cost of mobility down should be a prime objective. Sky-high transaction costs are not the logical bedfellow of labour mobility.

What is less easy to measure is the effect of the changes in taxation for non-doms and those using companies as an ownership vehicle. Until recently the UK was not in the same league as Monaco or Jersey in the pantheon of tax havens – but not far off. Many, born in the UK and living here for decades, with perhaps a sojourn in Hong Kong in mid career, have benefited from a tax status that doesn’t seem to exist in the same form anywhere else. These people often have houses around the world – so the urge to stay overlooking the Thames has just become less compelling. On the other hand, what is often overlooked is that non-dom status has not been banned; just restricted to seventeen years. The new transparency of property holdings and exposure to both Capital Gains and Inheritance Tax is, however, a big change. It’s our bet that this will end up being the long-term market shifter when everyone has got used to the new SDLT regime.

Currencies are both a cloud and silver lining – depending on where you are coming from. If you are dollar based – or the equivalent i.e. any currency pegged to the US Dollar like the Hong Kong Dollar, or even the Saudi Riyal (despite the oil price) your London property became about 15% cheaper last year. On the other hand, if you are Russian, it doubled over the same period. These currency fluctuations are creating some interesting dilemmas. Take the Battersea Power Station site. Its developers are Sime Darby, a Malaysian company, and many investors are Malaysian and paying for their purchase in stage payments as it gets built. They fixed the price when they bought it – great if the market is going up and you flipped it early on. The problem is that the Ringgit has dropped nearly 20% over the last year which means the next stage payment got a whole lot more expensive just as the market in new developments on the south side of the river has became somewhat soggy. As the construction finance is dependent on these stage payments there must be some nervous developers out there.

One of the good things about a few clouds is that even the most bullish of sellers is now getting the message that the right reaction to headwinds is not to ask 20% more than the market will pay. This was what we were up against last year with the result being a market of greatly reduced transactions – particularly at the top end where sellers saw no need to share the SDLT pain. The good news is that they now do – well, most anyway – and we are negotiating deals today that would have been impossible even in the late autumn. This is translating into more sensibly priced new stock, as well as stale news freshened up by a price cut.

We have observed before that the effects of the new SDLT regime seem to be more muted in the country. Why? It’s probably a function of timescale as most country buyers have a lifetime view of the house they are buying. 15% over four years is painful; 15% over fifteen years becomes a tax you lose sight of. There is also, in the country, significantly more chance of claiming mixed use and so reducing the SDLT burden. This is resulting in a resurgence in the country market that contrasts with the capital. London is more transient and our guess is that the more light-of-foot will now rent rather than buy. The average profile of our clients now looks more like it did ten years ago – more domestic and less international. Will this be the new normal? It’s too early to say.

The one thing that a slowing market does show is the reality behind marketing hype. A classic example of this is a newly developed block on Victoria Street, equidistant between Eaton Square and the Houses of Parliament, crucially with an SW1 postcode. What’s not to like? The price mainly. It was sold at around £2000 psf off-plan, which was big money for the reality of a pretty dreary high street. The likelihood is that many of those buyers were seduced by the SW1 postcode without realizing that not all SW1 is created equal: a hundred yards, let alone half a mile, is a long way in valuation terms. The secondary market flats are priced at around £1700 psf but would probably sell for less – which adds up to an expensive geography lesson.

This building started life as an office and, like so many offices all over central London, it metamorphosed into a residential block – but at the obvious cost of reducing the amount of office stock, with an (obvious with hindsight) effect on office rents which have gone through the roof: in the West End over £100 psf is commonplace. What this means is that the valuation anomaly between residential and commercial has now closed. Expect more offices and less residential in the future.

We are far from Panglossian – all is clearly not for the best in the best of all possible worlds – but our sense is that the market later this year will be stronger than many think. The short-term merchants, the traders and developers and those in transit through London, have been seen off by the Chancellor. But life goes on for the rest of us and, as sellers work out the new reality and price accordingly, we think that those with a long term horizon will bite the bullet and get on with it. The froth has been blown off – but there are still good reasons why London has global appeal.

 But caveat emptor still applies.