Post-UK referendum uncertainty has compounded the impact of successive tax rises on values in London’s prime housing market and will delay the sector’s return to growth while boosting the Dubai market.
The report says there have been signs of regional investors pulling out of the UK capital following the Brexit vote and turning to the UAE city as a property investment option.
"There remains a strong preference for London properties in the long-term as the city is still considered by most as a safe haven, even on the back of Brexit. Nevertheless, we have seen some Middle East investors looking to re-allocate a part of their portfolio to other geographical areas, due to the uncertainty in the mid-term that Brexit has triggered," says David Godchaux, the chief executive of CORE
"Dubai, as another strong regional safe haven, has recently benefited as we have witnessed an increased inflow of capital from other GCC countries in the context of a bottoming market and high yields, making the emirate increasingly attractive," he said.
The firm anticipates that London’s highest-value homes market will continue to adjust throughout 2016. Value fluctuations are then expected to hover around zero for the next two years as Brexit negotiations play out, before returning to capital growth in line with the long-term trend in 2019.
The prime central London markets, where values average about £4 million (Dh19m), have been most impacted by changes to stamp duty since December 2014. Prices were 8.1 per cent below their 2014 peak by the time of the June 23 referendum on the EU, including falls of 2.2 per cent in the first six months of this year.
As a result, CORE believes that further price adjustments downwards in the order of 6 or 7 per cent will be required to secure sales as buyers wait to see how Brexit negotiations proceed, and the impact on the UK and London economy becomes clearer, although the falling pound is a clear boost to international buyer interest.
Prime central London values are therefore now expected to close 2016 down 9 per cent and stabilise for the next two years, says CORE. A return to growth in 2019 is forecast, with total growth of 21 per cent in the five years from 2017 to 2021.
The lower value, more domestic outer prime London markets, where the average house price is £2m, were less impacted by the December 2014 stamp duty increases and values rose 2.3 per cent in 2015. However, a further 3 per cent surcharge on second homes combined with pre-referendum uncertainty to suppress growth in the first six months of this year and contributed to reduced fluidity in the market.
Total price falls of 5 per cent are forecast by CORE for outer prime London in 2016, with lower total five-year growth to end of 2021 of 14.6 per cent, reflecting mortgage lending constraints and greater caution around financial-sector job security.
"We now need further small adjustments to bring buyers back to the table in greater numbers and early signs from the autumn market are that committed sellers have adjusted their prices by between 5 and 10 per cent. The current situation is reminiscent of the 2002 to 2004 post-bull run period when a less significant financial shock combined with an uncertain geopolitical backdrop. Prices then fell a total of 10 per cent.
"There will be opportunities across the prime London market for those prepared to take a medium term year view, but it will require sellers to recognise the subtleties of a market that is likely to distinguish between the very best stock in the best locations and the rest," said Mr Cook.
"Looking further ahead, we know the prime London markets have generally rebounded strongly after a period of adjustment. While the tax backdrop will continue to be factored into buying decisions, no other European city has the infrastructure to match London as world city and global financial centre and this should underpin a return to trend levels of growth."