Prime London property prices could halve on Brexit, says SocGen

Property prices in London could fall 30%, with prices in the most expensive boroughs at risk of a 40-50% correction in the aftermath of the UK’s decision to leave the European Union, according to Societe Generale.

“We see a classic housing bubble in London and Brexit as the trigger for the correction,” said analyst Marc Mozzi.

“The British exit from the EU has struck fear into the UK real estate market at a time when the property upswing cycle looked set to reverse anyway on growing supply and high prices.”

SocGen said the past two cycles and its own forecasts suggest commercial property prices could fall 25% peak-to-trough on a rent decline alone. In addition, investors are also rushing to sell their liquid positions in UK real estate investment trusts and commercial real estate property funds, with five now having suspended redemptions.

Mozzi pointed out that Brexit could lead to the loss of jobs in the City of London as companies are forced to relocate outside the UK to retain access to the EU’s single market, which in many cases could mean workers selling their homes in some of London’s priciest boroughs.

“A simplistic ‘back of the envelope’ computation shows there were 3,140 real estate transactions registered above £2m in London in 2015 (and 920 in 2016 leading up to Brexit). If we assume 500 managers from twenty firms relocate outside the UK (so as to retain access to the single market), of which one-third of those households are ‘forced-sellers’, we end up with a potential volume of transactions of 1-2 years that prime segment.”

Mozzi said that given the current ratio of prices to incomes in London, a price correction of even 40-50% in the most expensive London boroughs was not impossible.

It pointed out that during the subprime crisis, UK residential prices fell 18% and London residential prices by 20% peak to trough, as 55,000 jobs were lost in the financial industry.

As far as the weaker pound is concerned, Mozzi said this would only momentarily rush transactions.

“According to the London estate agents Stirling Ackroyd, a weaker pound has pushed overseas investors looking for an opportunistic purchase in London,” SocGen noted.

However, this is just a periodic trend. "It would not make sense for investors to keep buying if the sterling continues to decline, as it also decreases the value of their assets.”