Discounts for overseas buyers widen as pound comes under pressure
Uncertainty over the UK’s economic outlook and the prospect of aggressive rate rises in the US have made prime London property more attractive to overseas buyers.
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Financial markets have reacted warily to new UK Prime Minister Liz Truss.
Uncertainty surrounds the inflationary impact of her proposed support measures in the face of spiralling energy costs and the potential damage to the stability of the UK economy, a theme we explored last week.
While the pound has been one of the worse-performing major currencies this year, it’s also true that the dollar has grown in strength versus a series of other currencies, hitting parity with the euro in recent weeks. In addition to the US economy proving resilient and paving the way for more aggressive rate hikes, safe-haven investors have also been busy buying the greenback.
As financial markets decide what Liz Truss ultimately means for the UK, a weak pound will act as a shock absorber for some parts of the economy, supporting the share price of London-based companies who are paid in dollars for example. The same is true of the residential property market in London’s prime postcodes.
The exchange rate fell from US$1.71 at the start of July 2014 to US$1.15 in early September this year, which highlights the size of the relative discount for US buyers and those denominated in pegged currencies such as the Hong Kong Dollar and currencies in many parts in the Middle East.
It is only part of the story though, with property prices also having fallen due to political uncertainty, tax hikes and international travel restrictions. Average prices in prime central London fell 13% over the eight-year period.
When you combine the effect of falling property prices and a weaker pound, the discounts on offer can reach surprisingly high levels, as the table below shows. The effect was initially looked at last week by my colleague Liam Bailey, although we have updated to account for currency movements in early September ahead of Liz Truss becoming PM.
The largest discount can be found in Knightsbridge, an area of the capital where prices are still 24% below their 2014 level. Combined with the currency movement, a US buyer would have benefitted from an effective discount of 49% at the start of this month compared to July 2014.
Buying a £5 million property in Knightsbridge would have previously required US$8.6m, a figure that had shrunk to US$4.4m last week.
Discounts are smaller in areas including Islington and Canary Wharf as prices have not fallen by as much over the period. For similar reasons, flats provide a steeper discount than houses in PCL.
The discounts have grown wider at a time when international travel is approaching its pre-pandemic levels from many areas.
International arrivals at Heathrow in June were only down by 17% on the same month in 2019. That compares to an equivalent drop of 87% last June, although the figure is still below half from the Asia Pacific region.
The relative price discount and re-emergence of international travel are two of the reasons we believe price growth prime central London will outperform other areas of the UK in the next five years.