Despite political uncertainty and a relatively gloomy economic outlook, the wall of capital targeting prime central London (PCL) residential opportunities continues to be robust, with overseas investors continuing to look to deploy money into London. This should be of no surprise, with the sector potentially offering good value for cash-rich investors.
Despite strong growth since summer 2021, PCL capital values remain 9% lower than 2015. PCL values peaked in January 2015 at £1,830 psf (365-day average) and fell to a low of £1,505 during the pandemic. Since then, values have increased to £1,671, but this remains 9% below the 2015 peak.
THE TAX DRAG
The key reason for the drag on values since 2015, has been the change in the way Stamp Duty Land Tax (SDLT) is calculated. This pushed up the amount of tax a PCL buyer would typically pay. Previously, SDLT was calculated using a single flat rate of tax on the entirety of each residential purchase. The 2014 reform introduced a new progressive system where different rates apply to each portion of the amount paid within each price band. The reform increased the amount of tax paid on property purchases over £125,000.
A £2.5 million property in PCL, SDLT before the December 2014 reform would have cost £175,000. After the reform, it cost £213,750, with that reduced slightly to £211,250 post mini-budget.
The UK Government has since followed up the wide-ranging 2014 SDLT reform with a raft of additional measures intended to target investors. These include:
- An extra 3% tax on additional properties, introduced in 2016. This added £75,000 to the SDLT bill for the purchase of a £2.5m property, taking the overall amount payable to £288,750 (£286,250 post mini-budget);
- An additional 2% surcharge for overseas buyers, introduced in 2021. Adding another £50,000 to the tax bill;
- A suite of new taxes applied to purchases made by companies, partnerships, and collective investment schemes.
As well as these tax changes, the period between the Brexit Referendum and the UK leaving the EU undermined buyer confidence in the market and created further uncertainty, with the pandemic quelling demand even further, due in part, to its impact on people who travel internationally.
These challenges – and the limited bounce back – means that there are now attractive opportunities for those looking to purchase in PCL.
The greatest differentiator in value is likely to come from the weakness of sterling. The declining value of the pound means that overseas buyers are likely to get more for their money, despite having to pay higher SDLT.
Financial instability has caused the pound to drop against other currencies. Take the US dollar for example - in January 2015 the UK to USD Spot exchange rate was 1.51, and this is now only 1.13.
If we take into account the PCL capital value discount (2015 vs 2022) and the depreciation of the pound, overseas buyers are receiving a healthy discount in PCL. Discounts range from 17% with the Australian dollar to 32% with the US dollar. A 32% discount on a £2.5 million property is £800,000, which certainly outweighs the higher SDLT bill.
We expect this discount to attract overseas buyers and help protect the PCL market from the looming economic headwinds.
Sources: Cushman & Wakefield, Moody's, LonRes (365 day average)
For further information on prime central London residential values, please contact Millie Todd.