The pound drop has attracted more buyers than ever, but is the surge in interest enough to drag prime central London out of the period of lull? Rosie McCormick Paice investigates.
For many months the prime central London residential property market has been in a weakened state. A Conservative victory in May 2015 knocked rumours of a forthcoming mansion tax on the head. However the market did not bounce back as hoped as fears over the world economy and the announcement of further swingeing tax measures designed to hit investors eroded optimism in the market.
Now that the UK has voted to leave the EU, the PCL residential market is undergoing yet another crisis of confidence. LonRes, the premier data source for PCL property, has reported that the number of cuts to asking prices has surged to 163 per cent following the referendum result. This leaves both buyers and sellers in a state of flux.
A 'market price' is one that is established by the balance of supply and demand. As demand falls prices fall and sellers become reluctant to sell. This reluctance produces a shortage of supply which leads to prices rising. These constant corrections produce an efficient market. However, the market has suffered a huge shock with market commentators referring to a 'major price correction' needing to take place to restore confidence and stability to the market.
Reference to a 'correction' implies that current prices are wrong – but what is a 'correct' price? As barely a month has passed since the Brexit vote, it is enormously difficult to establish proper comparables for properties coming onto the market.
Sellers with properties under offer are concerned that buyers will seek priced reductions to what the seller may have already regarded as the correct price.
According to the law in England and Wales (it is different in Scotland) the price is fixed on exchange of contracts when a contract becomes binding. Prior to exchange either party can seek to renegotiate the price.
Following exchange, a buyer will face penalties if it withdraws before completion. Likewise, if the buyer fails to complete and is served with a notice to complete requiring completion within ten working days. These penalties include loss of the deposit and the payment of costs – not just legal costs.
The deposit paid on exchange is usually 10 per cent but sometimes sellers are asked to accept smaller deposits. However, the legal position is that if a buyer were to withdraw then a full 10 per cent is forfeit. This can leave a seller pursuing the defaulting buyer for the balance of the 10 per cent deposit if a smaller deposit had been paid. For this reason, sellers are always advised to insist on a full 10 per cent deposit being paid – especially if the buyer is based overseas and has no UK assets.
In a falling market a buyer may decide that losing the 10 per cent deposit might be preferable to purchasing an asset that may reduce over a tenth in value. During the 2008 financial crisis the incidence of buyers walking away from transactions – content to lose their deposits - became more commonplace.
But the market has not collapsed. In every market there are bargain hunters. Many buyers have been waiting for prices to fall before purchasing in the expectation that in due course prices will rise again. For many overseas buyers, purchasing in London has become a whole lot cheaper in recent months – especially if you have US dollars to spend.
The oversupply of upmarket apartment blocks has meant that developers have been keen to negotiate generous deals for buyers. One example is a US-based buyer purchasing a high specification apartment in a mid-town development. A combination of the USD / GBP exchange rate, general price corrections and developer keen to shift the final few apartments has produced a bargain for her of nearly 30 per cent.
As more bargain hunters come into the market prices during a time of restricted supply prices will naturally recover. Obviously it is very hard to accurately predict the extent of that recovery and the timescale. Investors should continue to closely watch the market and look for opportunities.
Rosie McCormick Paice is a real estate partner at Pemberton Greenish.