London commercial property prices could decline by as much as 25% peak-two-trough while London residential prices could experience an even more severe downturn, that’s according to a research report on the UK’s property market from Société Générale.
According to the bank, both of the UK’s property markets, the commercial market, and the residential market, are at the mercy of Brexit risks. Cracks were already appearing in the UK real estate market before Brexit, but the UK’s decision to turn its back on Europe has only accelerated the fracturing of the market.
Commercial property is set to be at the forefront of the UK’s real estate market troubles. While initial signals about the state of the market have been mixed (five UK commercial property funds have suspended redemptions since Brexit but large transactions
Professional services network PricewaterhouseCoopers estimates that there will be 70,000 to 100,000 fewer jobs in the UK financial services sector by 2020, and 950,000 across the UK as firms move trading arms out of the UK to more international markets with access to Europe’s free trade zone. Société Générale predicts that 50,000 job losses in London could see office rental values fall by 24%, based on historical figures. The figure of 50,000 job losses in the capital is based on historical boom-bust cycle figures.
Long bull run
UK real estate has been on an impressive run since the financial crisis but after this run, many sectors are now looking expensive. Commercial property yields have plunged as investors seek exposure to the sector at any cost. The £400 million Debenhams property in Oxford Street sold at a yield of 2.75%. At the beginning of 2016 analysts, at Carter Jonas predicted that total returns for UK commercial property would amount to 8.8% in 2016, down from 13.4% in 2015 as yields approached 2007/2008 peaks.
Property Company Short Positions Are On The Rise In London
So, Société Générale’s pessimistic forecast that commercial property prices could drop by a quarter following Brexit might not be as unrealistic as it looks. It could be argued that the UK commercial real estate market is now priced for perfection, and if demand falters, property prices could quickly retrace as investors reconsider their exposure to the sector.
But it’s not just the commercial property sector that is likely to see prices come under pressure during the next few years. London house prices, which have surged more than 60% over the past three years, could be even more susceptible to a market correction.
London property prices could fall 50%
London home prices are now 12 times average London earnings compared to the long-term average of six times. Moreover, London is 50% more expensive than the second most expensive area in the UK and regarding initial mortgage repayments, London is the only region in the UK above the 33-year average. Simply put, London residential property is expensive, and when you combine this with the impact of job losses and the potential relocation of European citizens already in the country, it becomes apparent that the market is highly likely to see a fall in residential home prices as the UK renegotiates its position in the EU.
Analysts at Société Générale believe that a residential price correction of even 40% to 50% is possible in some of the most expensive boroughs in London is home prices return to the average long-term price-to-income ratio of six times. This decline already seems to be taking hold. The Independent reported earlier this week that some property deals are being renegotiated 10% to 15% below the level they were at a week ago, and the Royal Institution of Chartered Surveyors believes prices could drop another 26% over the next three months.