The London prime and super-prime real estate market has been seen as a safe, stable and reliable investment for several decades. Outside of dips in pricing based on global recessions, nothing has ever cast real doubt in this market before. As part of the EU, London has claimed the spot as the business and financial capital of Europe, an easy springboard both commercially and personally to the rest of Europe. Foreign and particularly Russian, Middle Eastern and Asian investors, value the UK passport and traditionally see London as a convenient gateway to the rest of Europe. Beyond the ultra-wealthy, the role that London has managed to carve for itself in Europe has influenced its post-colonial and post-war identity, expanding an environment of international diversity, culture, food, night life, etc. Because of its business, financial, social and cultural strength, London has been an incredibly attractive city for the Wealthy and Ultra-Wealthy to maintain a home and business (depending on the source used, London is ranked between 1st and 5th in the list of global cities where the most UHNW individuals live).
Despite the Brexit deadline being extended to October (or possibly only June) there is still no certain outcome. It is interesting to consider the impact that different Brexit scenarios could have on London’s positioning as an attractive investment for UHNW individuals.
The Brexit Referendum: After the 2016 popular vote, in anticipation of the upcoming hard or soft leave, the market has behaved in a few different ways already giving signs of the impact to come.
· For the first time in several decades the premium real estate market in London has seen a drop in prices in a non-recession period and despite a strong global economy. According to Coutts the annual fall in number of prime properties sold is 12.1% and the fall in prime prices since Q4 2017 is 6.8%. This is to be expected, with the current level of uncertainty, the average buyer or seller is incredibly cautious.
· While the prime properties have dropped in prices, until recently the super prime market has been behaving differently, with £10M+ properties selling at asking price and moving quickly. This is largely due to foreign investors taking advantage of the devaluation of the pound which puts these properties at a 10-15% discount for them versus pre-referendum prices.
· We have already seen shifting of FDI according to a recent study by the London School of Economics, with the fall in investment of 11% from Europe and the outflow of UK businesses into Europe increase by 12%. The market in general is already shaken regardless of the outcome.
Hard or Soft Brexit – what happens?
The future of the Super Prime market will depend on the scenario that plays out with either a Hard or Soft Brexit (or even on Remain, which, for the purpose of this discussion, will have an impact not very dissimilar from soft Brexit).
With a hard Brexit for the short term the market will be in further chaos, it will likely take time for some final agreements to take shape and thus the UK will lose out on further investments. We can expect more speculative deals to happen as the pound further depreciates. Over the long term we can expect that the government will take efforts to stop the bleeding through stimulus activities such as further tax cuts at which point the pound should recover.
Those who have thus far taken advantage of the devaluation of the pound to pick up exclusive properties at a discount are likely betting on a soft Brexit. If this does happen, the pound should bounce back relatively quickly and the speculative buying will end.
In either case, the market is fairly shaken and perception of London as the financial capital of the region is in doubt. The country is divided politically with deep frustrations in a government that cannot seem to deliver a deal, and socially across generations, geography and income. With no “seat at the table” the UK will no longer have significant influence across the region politically. And with no straight forward trade deals (such as an EU membership offers) the UK is no longer the springboard to Europe. All of which will weigh on any investor’s mind as they make decisions moving forward.
Real estate is not a straight forward financial investment. It is 50% financial and 50% emotional, even at the top end. The social, political, geographical and commercial confusion caused by Brexit has cast doubt on the UK. For the ultra-wealthy investing in property in London is no longer the “no brainer” it used to be. This feeling my not be apparent from day one, but over time London could really lose its luster.
Note: It’s important to remember that ultra-high net worth individuals (net worth greater than $30 million), behave differently than even the high net worth market. This looks at what might happen to the super prime real estate market (properties at £10 million and above) given the different Brexit scenarios. It also focuses on the London real estate market excluding the rest of the UK as there are definitely 2 distinct markets in the UK, London and the rest. I am only focusing on UHNW real estate interests – both commercial and residential.