THE BREXIT EFFECT RISING RENTS PROPERTY VERSUS STOCKS

LONDON RESIDENTIAL REVIEWAUTUMN 2018

RESIDENTIAL RESEARCH

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Uncertainty surrounding the outcome of Brexit talks has affected the sales market in several ways in the second half of 2018.

First, it has curbed sales volumes. In the year to August 2018, there were 9% fewer transactions in prime central London than the previous 12 months, LonRes data shows.

This decline contrasted with an increase of 7% recorded in the year to March, which was a sign that transactions had begun to recover following the EU referendum. However, as Brexit approaches and the negotiations become more urgent, volumes have receded. A similar downwards trend in the number of sales across Greater London since last year can be seen in figure 2.

This somewhat changeable flow of data has been a feature of the prime London property market in recent years. As transaction volumes or pricing begin to stabilise, external events put any recovery on hold.

In recent years, these external events have included two general elections, the EU referendum and tax changes. However, none of this should obscure the fact that underlying demand remains robust as the Brexit talks near their conclusion.

Some 12.5% more new prospective buyers registered in the third quarter of this year than the same period in 2017, as figure 1 shows. Meanwhile, the total number of prospective buyers was up by a fifth over the same period.

Indeed, the number of prospective buyers in both prime central and prime outer London increased by 31% between January 2016 and August this year.

On the supply side, the number of new listings declined 10% in the third quarter of 2018 compared to the same period last year. Meanwhile, the number of properties valued for listing fell 6% over the same period. Rising demand and falling supply suggests pent-up demand is forming.

The other impact of political uncertainty has been on pricing. In a similar way to transaction volumes, pricing trends have also been inconsistent over the course of 2018. Average prices fell 2.9% in the year to September, which compared to a more modest decline of - 0.7% in January.

In addition to the political backdrop, price declines were exacerbated earlier this year by an increase in supply as more landlords respond to tax changes by selling or listing their property for sale, though the number of listings has dipped in recent months ahead of Brexit.

Although Brexit uncertainty is intensifying, talks are due to reach some form of resolution by the end of this year, which suggests current levels of uncertainty will be short-lived.

Furthermore, the fact prices have now adjusted for higher rates of stamp duty suggests volumes will strengthen once the political uncertainty recedes.

Meanwhile, in a positive signal for demand in the prime London property market beyond Brexit, the take-up of new office space in central London has been rising. The 12-month rolling total rose to 14.6 million square feet in the second quarter of 2018, which was 15% higher than 12 months ago.

PRIME LONDON SALES MARKET INSIGHT Sales volumes are weakening as Brexit approaches, however pent-up demand is building

12.5% Increase in the number of new prospective buyers in Q3 2018 compared to Q3 2017

9% Decrease in the number of transactions in the year to August 2018 compared to the previous 12-month period in PCL

31% Rise in the number of prospective buyers in prime central and prime outer London since January 2016

14.6 million Total square feet of office space taken up in central London in the year to June 2018, up 15% from 12 months earlier

KEY FINDINGS

“The fact prices have now adjusted for higher rates of stamp duty suggests sales volumes will strengthen once the political uncertainty recedes.”

Source: Knight Frank Research Source: Knight Frank Research / Land Registry

RESIDENTIAL RESEARCHLONDON RESIDENTIAL REVIEW AUTUMN 2018

Please refer to the important notice at the end of this report

TOM BILL Head of London Residential Research

FIGURE 1 Pent-up demand rises as Brexit approaches Q3 2018 versus Q3 2017 % change, PCL

FIGURE 2 Sales decline as Brexit approaches Greater London sales since the EU referendum

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PRIME LONDON PRICE AND RENTAL GROWTH, SEPTEMBER 2018

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RESIDENTIAL RESEARCHLONDON RESIDENTIAL REVIEW AUTUMN 2018

KEY FINDINGS

While uncertainty surrounding Brexit is having a discernible impact on the sales market, the lettings market has been more affected by fiscal than political events.

A succession of tax changes for landlords that continue to 2020 means an increasing number have either sold or listed their property for sale. This, in turn, has resulted in a decline in supply and put upwards pressure on rental values.

There were 7% fewer new lettings listings in prime central London in the year to September 2018 than the previous 12 months, Rightmove data shows. The equivalent decline was 10% in prime outer London.

As a result, annual rental value growth has returned to prime central London and the annual declines in prime outer London are moderating.

Average rents in prime central London grew 1.1% in the year to September, while the annual change in prime outer London was -1%, which was the most modest rate of decline in two and a half years, as figure 4 shows.

A reform to tenant fees is one recent change that may exacerbate this trend. The change, which is likely to be introduced next year, could prompt more landlords to review their portfolios amid increased administrative charges.

Other tax changes in recent years relate to mortgage interest relief, wear and tear allowances and stamp duty.

Meanwhile, there was an announcement in the Budget that landlords who have previously lived in the property being rented out will no longer benefit from capital gains tax relief, which will impact owners who have become landlords after being unable to sell.

As a result, landlords have a growing list of considerations when managing their portfolio. The proposal by a Conservative think tank to scrap capital gains tax for landlords who sell to tenants who have lived in the property for three years is another example of this.

Though some landlords have attempted to sell in recent months in response to recent tax changes, a number of them have returned to the lettings market after their pricing expectations were not met, as figure 3 shows.

Despite declining levels of supply and the uncertain political backdrop, Knight Frank agreed 6% more new tenancies in the year to September 2018 than the previous year.

The total annual return in prime central London, a figure that takes the gross initial yield and annual capital value growth into account, was 0.3% in September.

While this is lower than some previous years, it is stronger than other asset classes. The price of gold and the FTSE 100 fell by more than 5% in the year to mid-October.

PRIME LONDON LETTINGS MARKET INSIGHT Rental value growth gathers pace in prime central London as tax changes mean supply levels continue to fall

1.1% Rental value growth in prime central London in the year to September

6% Increase in the number of new tenancies agreed by Knight Frank in London in the year to September 2018 compared to the previous 12-month period

7% Decline in the number of new lettings listings in prime central London in the year to September compared to the previous 12 months

-5.6% Fall in the gold price in the 12 months to mid-October, which compared to an annual total return of 0.3% in prime central London in the year to the end of September

Source: Knight Frank Research / Rightmove Source: Knight Frank Research

FIGURE 3 To sell or to let? % share of all listings in prime London

FIGURE 4 Property outperforms other asset classes Annual change, PCL and POL to end of September, FTSE100 and gold to 18 October

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Important Notice© Knight Frank LLP 2018 – This report ispublished for general information only andnot to be relied upon in any way. Althoughhigh standards have been used in thepreparation of the information, analysis, viewsand projections presented in this report, noresponsibility or liability whatsoever can beaccepted by Knight Frank LLP for any loss ordamage resultant from any use of, reliance onor reference to the contents of this document.As a general report, this material does notnecessarily represent the view of Knight FrankLLP in relation to particular properties orprojects. Reproduction of this report in wholeor in part is not allowed without prior writtenapproval of Knight Frank LLP to the formand content within which it appears. KnightFrank LLP is a limited liability partnershipregistered in England with registered numberOC305934. Our registered office is 55 BakerStreet, London, W1U 8AN, where you maylook at a list of members’ names.

Knight Frank Residential Research provides strategic advice, consultancy services and forecasting to a wide range of clients worldwide including developers, investors, funding organisations, corporate institutions and the public sector. All our clients recognise the need for expert independent advice customised to their specific needs.

RESIDENTIAL RESEARCH

Tom Bill

Head of London Residential Researach +44 20 7861 1492 tom.bill@knightfrank.com

LONDON RESIDENTIAL REVIEW AUTUMN 2018

As Brexit negotiations reach their conclusion, there has inevitably been an impact on decision-making in prime London property markets.

While the number of sales transactions have dipped in response to the uncertainty, pent-up demand is forming, as we examine on page 2.

The outcome of the negotiations is unknown but there are grounds to believe a deal can be reached between the UK and the EU that prevents a disorderly exit.

Although brinkmanship is rising during the final stages of the talks, both the EU and the UK appear to be edging towards an agreement. One of the key points of disagreement has been the so-called Irish backstop arrangement, which is effectively an insurance policy in case a trade deal does not materialise.

The backstop plan involves the UK remaining in a customs union with the EU, which one group of Brexit-supporiting MP’s believes must be time-limited. The EU has indicated it does not want a time limit.

Despite the disagreement, there is also a group of MPs who believe the risk associated with voting down any plan the PM agrees is that the process is derailed altogether.

Trade Secretary Liam Fox gave an interview in October in which he suggested that any deal could be refined after March but that the overriding priority was to ensure Brexit took place.

Given the degree of pent-up demand forming in the sales market, if a deal is reached and ratified, this is likely to provide a boost to transaction volumes.

There is also evidence that far fewer jobs have been relocated from London than initially estimated as a result of Brexit. As few as 630 UK-based finance jobs have been moved overseas ahead of Brexit, recent analysis by Reuters showed. Indeed, a rise in the number of deals and inquiries involving relocation agents underlines the strength of demand from corporate tenants, as figure 5 shows.

Furthermore, the Reuters survey showed the number of jobs expected to move in the event of a hard Brexit was 5,766, down from 9,777 in September 2017.

MACROVIEW BREXIT APPROACHES

LONDON DEVELOPMENT HOTSPOTSRESIDENTIAL DEVELOPMENT OPPORTUNITY AREAS 2018

RESIDENTIAL RESEARCH

AREAS TO WATCH PRICE FORECASTS MARKET UPDATE

RESIDENTIAL RESEARCH

PRIME LONDON LETTINGS INDEX

PRIME CENTRAL LONDON

Prime central London index | 165.4

Prime outer London index | 172.2 Annual rental value change | -1.4%

Annual rental value change | 0.9%

Quarterly rental value change | 0.5%

Quarterly rental value change | 0.8%

SEPTEMBER 2018This report analyses the performance of single-unit rental properties in the second-hand prime central and prime outer London markets between £250 and £5,000+/ week. For an analysis of the build-to-rent market and the institutional private rented sector in London and the rest of the UK, please see our Private Rented Sector Update http://www.knightfrank.co.uk/research

PRIME OUTER LONDON

Figure 1 Annual rental value growth has returned to prime central London due to declining supply levels. Some landlords have sold or are trying to sell after recent tax changes and this fall in supply has put upwards pressure on rental values. A figure of 0.9% in September compared to a decline of -3% in the same month last year.

Figure 2 The supply of lettings properties has fallen in both prime central and outer London as more landlords sell or list their property for sale. There were 18% fewer listings in PCL in the year to August compared to the previous 12 months. The equivalent decline in POL was 13%.

Figure 3 The percentage of lettings listings in prime central London in relation to sales trended downwards in 2017 and the first half of 2018 as more landlords removed their properties from the lettings market and some were sold. This trend reversed in the middle of 2018, indicating some landlords have re-listed their property to let after their sale price expectations were not met, which would reduce upwards pressure on rents.

Figure 4 However, broad upwards pressure on rental values looks set to continue in the short to medium-term given the fact that the number of new prospective tenants per new lettings listing has hit a ten-year high.

FIGURE 3

Landlords remain indecisive % split of sales and lettings listings in PCL

FIGURE 4

Demand versus supply strengthens to a ten-year high New prospective tenants per new lettings listing in PCL

Source: Knight Frank Research Source: Knight Frank Research

FIGURE 1

Rental value declines bottom out... Annual rental value changes in PCL and POL

FIGURE 2

... as supply falls Number of lettings listings, rolling 12-month total

Source: Knight Frank Research Source: Knight Frank Research / Rightmove

-6%-5%-4%-3%-2%-1%0%1%2%3%4%5%

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RICHMOND LETTINGS MARKET INSIGHT 2018

FIGURE 1 Asking rents in Richmond and surrounding area Monthly asking rents, 12 months to August 2018 Circles can denote multiple listings in the same postcode, in which case the highest value is displayed

Source: Knight Frank Research / Rightmove

Up to £1,735

£1,735 to £2,600

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Richmond Lettings Market Update The number of listings in Richmond declined 12% year-on-year in August, as figure 2 shows, underlining how more landlords are attempting to sell their property due to a recent series of tax changes. A number of owners have also listed their property for sale and to let at the same time in case pricing expectations are not met in either market. Rental values have been broadly flat over the last 12 months. Meanwhile, activity levels remain stable, with the number of tenancies agreed in south-west London rising by 3% year-on-year in August, Knight Frank data shows.

Debbie Pinkham, Richmond Lettings Head “Supply and demand in the Richmond lettings market is changing, with a number of landlords opting to sell due to recent tax changes. This has reduced the number of available rental properties which is underpinning rental values. That said, there are still a number of ‘accidental’ landlords in the market who have attempted to sell but were unable to achieve their asking price and will sell when market conditions become more favourable. Many families relocating to London from overseas still choose to live in Richmond due to the area’s high-quality schools. However, corporate housing allowances are lower than they were a couple of years ago so landlords need to set prices competitively.”

FIGURE 2

Richmond fact sheet

Population: 260,270

AGE OF HOUSING STOCK

Pre-1900

1900-1939

1945-1972

1973-1999

2000-present

18%

37%

20%

16%

9%

Source: Knight Frank Research

NUMBER OF LISTINGSYear to August 2018 12,098 Year to August 2017 13,774 Year to August 2016 14,711

AVERAGE MONTHLY ASKING RENTYear to August 2018 £1,690 Year to August 2017 £1,740 Year to August 2016 £1,810 MAXIMUM MONTHLY ASKING RENTYear to August 2018 £37,485 Year to August 2017 £30,335Year to August 2016 £28,165

BLUE PLAQUES Virginia Woolf, author Sir Christopher Wren, architectJMW Turner, painterSir Noel Coward, playwright

STOCK BY PROPERTY TYPE

Flat

Terraced

Semi-detached

Detached

Bungalow

44%

28%

20%

6%

2%

Source: Knight Frank Research / Rightmove

RESIDENTIAL RESEARCH

PRIME LONDON SALES INDEX

SEPTEMBER 2018

PCL POL

PCL POL

PRIME CENTRAL LONDON

PRIME OUTER LONDON

Prime central London index | 5,777.50

Prime outer London index | 275.8 Annual change | -4.3%

Annual change | -2.9%

Monthly change | -0.5%

Monthly change | -0.6%Quarterly change | -1.4%

Quarterly change | -1.2%

Figure 1 Sales volumes in prime central London declined 9% in the year to August compared to the previous 12 months. After strengthening earlier this year, the dip highlights how uncertainty surrounding the final stages of Brexit talks are having an impact on the market, a short-term trend that may reverse once the outcome is determined.

Figure 2 In a similar fashion to sales volumes, pricing has weakened in recent months as uncertainty around Brexit continues. This trend has been exacerbated by a growth in supply as more landlords attempt to sell their property following tax changes.

Figure 3 Despite the fact that sales activity and pricing have dipped in recent months due to heightened short-term political uncertainty, underlying demand has continued to increase. The number of prospective buyers in prime central and prime outer London grew 31% between January 2016 and August this year.

Figure 4 Meanwhile, in a sign that pent-up demand is forming, the total number of new prospective buyers was 11% higher in August in prime central London than the same month last year. The equivalent rise was 6% in prime outer London.

The prime London sales indices are based on repeat valuations of second-hand stock and do not include new-build property, although units from completed developments are included over time.

FIGURE 3

Prospective buyers on the rise Rebased to 100 at January 2016

FIGURE 4

Pent-up demand rises ahead of Brexit Year-on-year % change in total number of new prospective buyers

Source: Knight Frank Research Source: Knight Frank Research

FIGURE 1

Sales volumes dip in prime central London ahead of Brexit Annualised % change

FIGURE 2

Prices in prime central London decline Annual % change

Source: Knight Frank Research / LonRes Source: Knight Frank Research

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Paddington Basin

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BAYSWATER LETTINGS MARKET INSIGHT 2018

FIGURE 1 Achieved rental values in Bayswater and surrounding area Achieved weekly rental values, 12 months to August 2018 Circles can denote multiple transactions in the same postcode, in which case the highest value is displayed

Source: Knight Frank Research / LonRes

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Bayswater lettings market update The number of lettings listings in Bayswater declined 10% year-on-year in August 2018, reflecting a broader pattern in prime central London for lower levels of supply. More landlords have explored a sale due to a recent series of tax changes. As a result of falling supply, annual rental values are strengthening across prime central London. Rental values in Bayswater declined 0.4% in the year to August, which compared to declines of more than 5% recorded at the start of 2017. Meanwhile, activity has increased and the number of tenancies agreed by Knight Frank in Bayswater rose 17% year-on-year in August.

John Humphris, Bayswater lettings head “Average rental values in prime central London are rising on an annual basis after a 28-month period of declines. However, we are still seeing modest declines in Bayswater, a fact which underlines how rents in the area need to reflect good value because of historically weaker demand compared to the other markets around the perimter of Hyde Park. However, properties that are specified and furnished to a sufficiently high standard are more likely to attract tenants to Bayswater. This fact favours institutional landlords like the Church Commissioners. Its properties generally have lower void periods than the market average in Bayswater and rental values for its properties are still robust.”

FIGURE 2

Bayswater fact sheet

Population: 27,135

AGE OF HOUSING STOCK

Pre-1900

1900-1939

1945-1972

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STOCK BY PROPERTY TYPE

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Source: Knight Frank Research

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Source: Knight Frank Research / LonRes

NUMBER OF LISTINGSYear to August 2018 1,085 Year to August 2017 1,295 Year to August 2016 1,168

AVERAGE WEEKLY RENTAL VALUESYear to August 2018 £635 Year to August 2017 £607 Year to August 2016 £608 MAXIMUM WEEKLY RENTAL VALUESYear to August 2018 £3,500 Year to August 2017 £10,000 Year to August 2016 £6,000

BLUE PLAQUES Lady Violet Bonham Carter, Politician, Writer Lord Randolph Churchill, PoliticianSir Giles Gilbert Scott, ArchitectMarie Taglioni, Ballet dancer

93%

The number of super-prime (£5,000-plus per week) tenancies agreed in London in the year to August was 5% higher than the previous 12-month period.

Demand continues to be driven by uncertainty surrounding the short-term trajectory for pricing in the sales market, which means a number of would-be buyers have become tenants.

However, the 5% annual rise in tenancies agreed marks a slowdown from the 20% uplift seen earlier this year. Tom Smith, head of super-prime lettings at Knight Frank, attributes this to two factors.

“First, political uncertainty has made some people slightly apprehensive about the next

six months,” said Tom. “Demand above £8,000 per week tends to be more discretionary, and we have seen the number of deals dip this year.”

Some 17 tenancies were agreed at a rent of more than £8,000 per week in prime central London between January and August 2018, down from 26 during the same period in 2017 and 27 in 2016, as figure 1 shows.

The second factor is the stabilisation of the super-prime (£10 million-plus) sales market. Despite the political uncertainty, higher rates of stamp duty are now reflected in pricing and buyer interest is rising as a result. The total value of all super-prime sales between June and August was 93% higher than the equivalent figure in 2017.

As the market stabilises, some landlords of super-prime properties have begun to consider a sale more actively, says Tom.

“The owners of around a third of super-prime properties currently on the rental market would consider a sale at the right price. This is a higher proportion than we have seen for several years,” he said. “Tenants are also starting to pay more attention to the sales market so I sense we are at the start of a period where more of them could become buyers, which is why tailored advice is absolutely critical.”

The number of super-prime lettings transactions continues to rise but the pace of growth has started to slow, as Tom Smith tells Tom Bill

48 Elsworthy Road, guide price £30,000 per week

Flat 3, 22 Pembridge Crescent, guide price £8,500 per week

LONDON SUPER-PRIME LETTINGS INSIGHT AUTUMN 2018

FIGURE 2 London super-prime lettings volumes and achieved rental values

FIGURE 1 Monthly number of £8,000+/week tenancies agreed in PCL

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Source: Knight Frank Research / LonRes

Source: Knight Frank Research / LonRes

Tom Smith Head of Super-Prime Lettings tom.smith@knightfrank.com +44 20 7881 7730

Please get in touchIf you’re thinking of letting your property, renting in London or would just like some property advice, please do get in touch, we’d love to help

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Charing Cross

Bond Street

Oxford Street

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Leicester Square

Soho

St James’sSquare

St James's ParkBuckingham Palace

Curzon Street

Mount Street

Grosvenor Square

Berkeley Square

Hyde Park Corner

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Park Lane

Regent Street

Number of sales £2 MILLION-PLUSYear to May 2018 148Year to May 2017 111Year to May 2016 118

£5M MILLION-PLUSYear to May 2018 65Year to May 2017 49Year to May 2016 57

BLUE PLAQUES Jimi Hendrix, Guitarist Lord Nelson, Naval OfficerFlorence Nightingale, Nursing ReformerFrederic Chopin, ComposerSir Isaac Newton, Natural Philosopher

MAYFAIR MARKET INSIGHT 2018

FIGURE 1 Achieved property prices in Mayfair Achieved prices, two years to August 2018 Circles can denote multiple sales in the same postcode, in which case the highest value is displayed

Source: Knight Frank Research / LonRes / Land Registry

Mayfair market update Average prices for existing Mayfair homes increased 0.5% in the year to August, compared to a decline of 2.3% across prime central London. Prices in the area have outperformed the PCL average due to the arrival of high-quality new-build developments and improvements to public areas by the Grosvenor Estate and the Crown Estate, which have underpinned demand across the whole market. The rise in transaction levels for homes priced above £2 million and £5 million over the last three years also reflects higher levels of activity at those price points in the new-build market.

Simon Burgoyne, Mayfair Office Head “With high-quality new-build schemes sitting alongside existing homes, the choice for buyers in Mayfair has widened notably in recent years. For the second-hand market, there is a risk that asking prices are set at a similar level to new-build developments, however vendors increasingly appreciate that direct comparisons are not possible with schemes that include amenities like a 24-hour concierge service, parking spaces or a gym. In overall terms, the £10 million-plus market in prime central London has now absorbed higher rates of stamp duty and as buyers sense price declines may be bottoming out, we have noticed activity strengthening in higher price-brackets.”

FIGURE 2

Mayfair fact sheet

Population: 15,649

Source: Knight Frank Research / LonRes / Land Registry

AGE OF HOUSING STOCK

Pre-1900

1900-1939

1945-1972

1973-1999

2000-present

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13%

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10%

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STOCK BY PROPERTY TYPE

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Semi-detached

Source: Knight Frank Research

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The Wealth Report

London Hotspots

Prime London Sales Index September 2018

Bayswater lettings Market Insight 2018

Prime London Rentals Index September 2018

Richmond lettings Market Insight 2018

Super-Prime Lettings Autumn 2018

Mayfair and St James’s Market Insight 2018

FIGURE 5 Executives are still relocating to London Year to September 2018 versus year to September 2017

Increase in the number of deals done by Knight Frank's residential Corporate Services team that involve a relocation agent

Increase in the number of inquiries from relocation agents to Knight Frank's residential Corporate Services team

+23%+16%

Source: Knight Frank Research

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Noel Flint Head of London Sales +44 020 7861 5020 noel.flint@knightfrank.com

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Tim Hyatt Head of Lettings +44 20 7861 5044 tim.hyatt@knightfrank.com