by Tom Bill
The conflicting economic data since the UK voted to leave the European Union are shaping a consensus view that it remains too early to assess the impact of Brexit.
The same is true of the residential development market in prime central London. Brexit has brought pre-existing dynamics into sharper relief but is otherwise having a relatively minor bearing on a market that is still digesting a series of tax changes that included two stamp duty rises in 18 months.
“Brexit is not having a particularly adverse or positive impact on the market,” said Ian Marris, Knight Frank’s joint head of residential development. “What the market is dealing with is the fiscal drag of taxation.”
“Developers are managing their margins by focussing on details like containing construction costs and refining their schemes so capital values are at the right pricing point,” he said. “They are accepting of development risk but are not prepared to take on legal, technical or planning risk without an appropriate level of margin.”
Average residential development land prices fell for the third consecutive quarter in Q2 this year, dropping by 6.9%, as higher taxation impacted the viability of schemes. Average values were down 9.4% on an annual basis, meaning the index has returned to 2014 levels after several years of exceptional growth.
“We have come out of a bull market and now we are operating in normal market conditions,” said Marris. “These are the circumstances when you see very different relative levels of performance across prime central London. Product that is not best-in-class cannot be priced at a premium.”
In a market where demand is so sensitive to price and the quality of individual developments, it is misleading to generalise about particular locations or price brackets.
“Two schemes side-by-side can be performing very differently. The assessment of risk needs to factor in multiple characteristics but for developers who have benchmarked properly and done their homework deals are being done.”
