London saw a 26% drop in the number of listings sold above the £1 million level year on year in the second quarter of 2015 with the economic slowdown in China regarded as having an impact, a new report says.
The situation in China is having a knock on effect on global equities and other buyers are still holding back since the stamp duty increase towards the end of last year, according to Richard Barber, director at agents W.A. Ellis.
‘This could be perceived as good news for buyers, signalling a return to normality in the market due to more realistic pricing strategies. Such strategies will play a significant role for vendors looking to secure a prospective buyer this autumn,’ he said.
‘Discerning purchasers continue to take stock of last year’s increases to stamp duty and the ongoing strength of Sterling. After one of the most tumultuous weeks on record for the world’s financial markets, there is naturally considerable speculation regarding the real estate manifestations of the economic slowdown in China and knock-on negative impact for global equities,’ he explained.
‘In short, this will depend on the depth and duration of the nervousness that investors are now displaying and whether this becomes a protracted slowdown in investment activity,’ he added.
He pointed out that UK real estate is one area that traditionally experiences countervailing investment activity, with perceived defensive characteristics against weaker investment alternatives.
‘International investment in London commercial listing is currently running at around 60% of all Grade A space and this flow will remain strong well into 2016. Residential investment is also likely to experience continued support from international investors, with bricks and mortar investment often being compared with gold for its defensive investment characteristics,’ said Barber.
He also explained that there are exceptions to this trend, notably from economies experiencing a more severe currency devaluation and Russia, China, and Malaysia are all likely to fall into this category and investment flows from these countries may moderate through the remainder of 2015.
In contrast, weak equity and real estate investment alternatives from the largest traditional residential investors, Hong Kong and Singapore, could possibly drive improvements from these countries.
The report says that new build residential in London continues to perform well, notably in areas such as Nine Elms and East London, including Canary Wharf, where public transport and infrastructure improvements are driving seismic changes to the underlying real estate value.
However, Barber concludes that prime London pricing has been relatively weak for the past 12 months. ‘It may well be time that investors begin to again see value in these traditionally favoured locations during times of perceived uncertainty,’ he said.
According to Tom Middleditch, director at JLL Kensington, the prime lettings market has undergone an important shift in the second quarter of 2015 as pre-election weakness affected both sales and lettings but this was reversed with the Conservative party win.
‘Although transactions were not quite at the euphoric levels that some agents reported in the immediate election aftermath, prime markets are now rebuilding stock levels and should find moderate activity growth in the third quarter,’ he explained.
‘However, the lack of sales stock continued to push occupiers into rental listing; this was particularly notable for corporates, who, alongside strong demand from students, pushed up new lettings by 93% in June compared with 2014,’ he added.
But rental growth remains modest, with would be tenants staying price sensitive, aided by increased choice in the lettings market. ‘New listings should be supported by improving new build supply, expected to peak in 2017. This will ease the general shortage of quality lettings stock available and continue to keep a lid on rental growth,’ Middleditch pointed out.
‘As we approach the busy months of the year for the lettings market of prime London, activity has already started to pick up, and average rents are on the rise. An increase in supply, however, may keep rental price growth in check going forward. Since the election, agents have seen even stronger conditions with a further pick up in applicants, including corporate demand,’ he added.
Indeed, according to the report, average rental values across prime London are now 7.4% higher than they were this time last year. Meanwhile, the number of tenancies agreed rose by just 0.4% over the quarter.
‘With plenty of options for tenants, landlords still need to be realistic about pricing or they face extended void periods which are damaging. Tenants are being increasingly particular over their listing choices and are prepared to negotiate, often submitting multiple offers in order to secure the best deal,’ Middleditch said.
‘There is cautious optimism over the remainder of 2015 with the expectation of an increase in rents, but this will be measured by the level of new development stock coming onto the market competing with existing second hand homes,’ he added.