Election Direction - Market Comment Summer 201729 June 2017
The plates are moving again.
The problem with trying to make sense of the current politics and how they will affect the property market is that everything is moving so fast. Ask Theresa May. For anyone with assets, the election result looked like a disaster with Jeremy Corbyn in contention for a black door moment and a hung parliament that, so the axiom goes, is unstable and therefore bad for property and business. We are not normally on the rose-tinted side of things - but in this case we think the outlook is actually sunnier this side of June 8th.
First, Jeremy Corbyn is now solidly entrenched as Labour leader - and his far left policies are as unappealing to most voters - except students – as they ever were. He lost the election. Secondly, the break up of the Union is off the table. Thirdly, the ultra-hard Brexit, ‘no deal is better than a bad deal,’ is looking less likely - with a softer Brexit on the cards (though how this is possible is not clear). Fourthly, Philip Hammond is still in place and, from a narrow property perspective, this must give hope that something might happen to ameliorate the punitive Stamp Duty that has so hammered the market. Apparently (and this is one-degree hearsay) he loathes Stamp Duty. If he is feeling really brave, he might also tackle head-on the whole subject of property and local taxation: council tax (how can it be right that a £20m house pays only £1,375 per annum in Westminster?) and business rates (businesses pays through the nose because they don’t vote).
What we have seen and heard from our clients, and soundings around the market, suggest that the election, and its aftermath, is having surprisingly little effect on sentiment that was hardly bullish anyway. Maybe they are insouciant after so many political earthquakes - or maybe they subscribe to something that resembles the case we make above. Until the inevitably grim consequences of Brexit, hard or soft, become apparent, it is likely that the principal brake on the market will remain Stamp Duty, as it has been for the last two years - with cameo roles for the other horsemen of the property apocalypse, non-dom changes and regulatory tightening of the mortgage market.
As we have commented in the past, this has manifested itself in turnover - or lack of it. Buyers are tending to stay where they are and build up, down or sideways and only move when they have to. The counter-intuitive consequence has been an increase in prices. Land Registry figures for Central London for the year to April suggest an average increase of 5% - and this is against a background of Brexit. The country market is harder to read but the pattern is a familiar one in a thin market - competitive bidding and prices that surprise on the upside for the best and hard work for the rest. The trick for us (and everyone else) is to work out which are the really good houses and be prepared to deal with the inevitable competition.
In this sort of market, the role of the developer is particularly difficult. Gone are the days of arriving in Hong Kong with CGI photographs of a sunlit boulevard populated by latte-drinking, iPhone-fiddling, Boden-wearing nuclear families and being crushed by the weight of deposits landing on the desk of the sales team. Now, they are being crunched on both sides: by buyers expecting them to share the pain of Stamp Duty, and costs that have outstripped any official inflation figure. This is showing up everywhere - most notably in the Battersea Power Station where the developers have indicated that their margins have dropped from a planned 20% to 8.7%. Rather a lot of work for a not exactly stellar return. On the Power Station, it is now worth walking under the railway by Chelsea Bridge to have a look at what is going on. From there you can see the scale of the project and how it is actually going to look - and it’s impressive. Sadly for the developers, the costs of restoring the listed building itself has been the killer. It was these potential costs that put everyone off for nearly twenty years - and it turns out that they were only wrong in underestimating them.
At some point there will be an ‘Emperor’s New Clothes’ moment with some of the more secondrate developments all over the capital - not least because prices, expressed in price per square foot, are increasingly detached from those in the local markets surrounding them. At some point it will be noticed that a mansion block flat overlooking a park, is 30% cheaper than its tower equivalent with views of a railway line on one side and the neighbour’s choice of TV channel on the other. Quality and location are everything and where those stars are aligned they are still, if not exactly walking out of the door, seeing reasonable demand. Good examples of this are Finchatton’s Grosvenor Square development and the Chelsea Barracks site.
As every polling organisation can attest, forecasting is a mug’s game. What there are though, are patterns of behaviour - and we have been around long enough to see these at work. Flight to quality and a sticky market are normal bedfellows. Unless you are in a real financial crisis, with real distressed sellers, there are rarely real steals. In uncertain times buyers will find any excuse to do nothing. And there are always those that have made a lifestyle or family decision and who just want to get on with their lives. There are still enough of these around; not enough to feed the vast number of estate agents on every high street, but enough to make a perfectly functioning market - even with a hung parliament.