Photographer: Matthew Lloyd/Bloomberg

Brexit Adds to London Housing Market’s List of Woes

Already under pressure from higher taxes, London homebuilders fear the vote to leave the European Union will further weaken demand for properties.

“Brexit will undermine investor confidence possibly for an extended period of time,” said Mike Hussey, chief executive of Almacantar SA, a developer which recently began work on 54 apartments overlooking Hyde Park.

The pound plunged to the lowest since 1985, Asian stocks tumbled and U.S. Treasuries surged after Britain voted to quit the EU after more than four decades. The vote sets the nation up for years of bitter divorce talks and deals a body blow to Prime Minister David Cameron, who said such a result would tip the country into recession.

The U.K. Treasury warned before the vote that residential property prices would be as much as 18 percent lower than if the country stayed in the political bloc. The London market is facing a “major shock” because tax increases will reduce landlords’ returns to almost zero, causing them to sell homes and creating an oversupply, Deutsche Bank AG analysts Oliver Reiff and Markus Scheufler wrote in a note last week.

“The vote in favor of Brexit will generate a period of renewed uncertainty in the prime London residential market,” said Liam Bailey, global head of research at broker Knight Frank LLP. “Some demand, especially from investors, will be delayed and in some cases redirected.”

Home prices could fall as much 5 percent in the second half of 2016 and a further 5 percent in 2017, Howard Archer, chief European and U.K. economist at IHS Economics, said in a statement. Housing market activity and prices are at “very serious risk of an extended, marked downturn following the U.K.’s decision to leave” the European Union, he said.

Purchases of homes in the U.K. capital’s best districts fell to the lowest levels in 10 years in April and May, according to data compiled by broker Huntly Hooper Ltd. Prices in prime central London dropped 0.1 percent in May, Knight Frank said in a report on Thursday. Values in the Chelsea district were down 3.5 percent in the 12 months through May, according to the broker.

Developers in central London are offering institutional investors discounts of as much as 20 percent on bulk purchases as tax changes limited demand from private individuals. Barratt Developments Plc is seeking to sell a portfolio of more than 300 apartments in the Fulham, Nine Elms, Aldgate and Hendon districts.

It will take 150 years for Capital & Counties Plc to sell the homes planned for its Earl’s Court project at current sales rates, Jefferies LLC analyst Mike Prew said in a note in May. Reservations for new homes at Berkeley Group Holdings Plc, London’s largest homebuilder, fell 20 percent in the five months through May.

Mayfair Slump

Just 24 homes were purchased in London’s Mayfair district in the five months through May, at an average price of 3.34 million pounds ($4.5 million), data compiled by researcher Lonres shows. That compares with 40 homes at an average of 3.75 million pounds in 2014, according to the data.

Sterling’s weakness could boost demand for luxury homes. The pound slid by the most on record against the dollar, and reached its weakest level since 1985, as the nation opted to quit the European Union after more than four decades. That could encourage a surge in demand for perceived safe-haven assets including the most expensive homes in the U.K. capital, Hussey said.

A vote to leave would still have a long-term negative impact on demand and prices, Alasdair Nicholls, CEO at luxury developer Native Land, said before the vote.

(Corrects number of apartments under construction in second paragraph.)
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