Is London immune from a UK property crash?

City of London office blocks

Following the EU referendum, the performance of the UK economy has generally been more resilient than most investors expected. With the exception of a falling pound, the UK's economic growth rate and employment performance has been surprisingly strong. However, today's results from commercial property owner and manager Shaftesbury (LSE: SHB) show that things could be about to worsen for London property prices.

In its update, the real estate investment trust (REIT) states that there is a background of growing caution in property markets. It is beginning to affect some portfolio values and while its own estate recorded underlying capital value growth of 4.9% for the year to 30 September, this is likely to have been weighted towards the first nine months of the year.

Furthermore, Brexit has not yet begun. The period from 23 June to today may have included greater uncertainty than prior to the vote, but caution among businesses and investors is likely to increase as negotiations between the UK and EU begin. In fact, the EU has stated this week that the UK will not be able to cherry-pick the rules and regulations it is seeking. As things stand, it appears as though the UK may fail to obtain access to the single market unless it concedes at least some control over its immigration policy.

Clearly, negotiations between the UK and EU are unlikely to progress smoothly. This could leave the UK and London in particular in a state of limbo. Businesses and investors may postpone investment decisions until after the negotiations have concluded in order to see whether the UK will have access to the single market. Arguably, this matters even more to London since it is a global financial centre. If it does not obtain a financial passport for the EU or access to the single market in some way, shape or form, then it is not difficult to see international financial institutions and other companies moving into the EU.

In such a scenario, London property prices could fall significantly. Shaftesbury's results may show that its net property income increased by 6.7%, while footfall and trading in the West End and across its locations remained buoyant. However, that could all change in 2017 if Brexit impacts negatively on the outlook for the London economy.

Due to this, it is crucial to seek out a wide margin of safety in case of short term challenges. In Shaftesbury's case, it trades on a price-to-earnings (P/E) ratio of 57, which indicates that it is overvalued given the uncertain outlook it faces. However, within the REIT sector, Tritax Big Box(LSE: BBOX) has a P/E ratio of 20.5 and when this is combined with its earnings growth forecast for next year of 10% it equates to a price-to-earnings growth (PEG) ratio of 2.

This indicates that Tritax Big Box could rise in the medium to long term, although its short term performance may be hampered by difficulties within the UK and London property markets. While Brexit may not yet have caused a deterioration in the UK's economic outlook, this could easily take place in 2017. London is unlikely to be immune from this, although Tritax Big Box's valuation shows that it could be a sound long term buy.

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10 property hotspots

In Scotland, Edinburgh is seen as a city with huge growth potential. In 2014, prices in Edinburgh were up 10% in a post referendum boom that shows little sign of slowing down.

Local agents are not expecting quite such stellar growth for the next 12 months, but they think price rises will be well above the average predicted for the whole country.

Rightmove named this as the area where it expects house prices to grow the most over the next five years. It says that over this period there will be a huge number of people moving out of London in order to afford to get onto the property ladder. They want a reasonable commute combined with plenty of attractions in the local area, and Southampton offers all this. With relatively affordable housing stock, it's a prime candidate for growth.

Luton was Rightmove's candidate for the second biggest house price rises over the next five years. It emphasised that this isn't a mater of opinion, it is the result of crunching the data.

Luton is another major beneficiary of the move out of London, and while it is arguably not as attractive a place to live as Southampton, it's only 23 minutes into central London - which rivals some of inner London's commuter times. With average prices of £179,368, it's clearly a far more affordable option, and the area has already started to show signs of a boom.

This was the third area suggested by Rightmove. As with Southampton, it is well positioned for London commuters, and also has huge local attractions.

A survey last year asked young professionals to name the place they would most like to live, and Brighton and Hove were the only areas that appeared on the list outside London.

One of the reasons it's not higher up the list is that houses are already on the pricey side, with an average cost of £338,956 - up 13% in the past year alone.

There may be few people who grow up with the dream of living in Swindon, but the electrification of the rail line to London will bring travel times down across the West Country, so Swindon becomes part of the outer commuter area.

Given that the average property costs £168, 968, it's easy to see why Swindon will be a popular option for commuters on a tight budget.

Bath is also going to benefit from electrification of the line, because the commute to London will fall to a manageable 70 minutes. The beauty of the city - along with a vibrant social and cultural life - makes it a clear choice for more long-distance commuters.

Of course, with an average asking price of £374,617, it's not a tremendously cheap place to buy, but the geography of the city restricts development, so these prices are expected to rise still further.

Property Frontiers says that the booming house prices in Oxford are set to get even higher. At the moment, travel to London takes 60 minutes, but this will reduce even further in 2016 when the line is electrified. Prices in the most desirable parts of the centre aren't much cheaper than London.

However, further out there are pockets of affordability, and when the Water Eaton station opens in 2015 it will open up areas to the north of the city too.

Manchester has seen enormous property price rises over the last couple of years, and Property Frontiers expects this to continue into 2015.

Other commentators are expecting the growth to slow over the next few years, especially given the gains made since 2012. However, demand for properties remains buoyant, and with the growth of the local economy, price rises seem inevitable.

Rising prices in London have pushed buyers further and further out of the centre, so estate agents are now claiming zone three as 'the new zone 2'.

Savills believes that the biggest gains over the next five years will be the less glamorous districts - putting the South and East in the frame. Gritty areas that could benefit include Ladywell, Streatham and Catford in the south, and Leytonstone, Forest Gate and Walthamstow in the east.

Cambridge could also perform well. It has already had house prices lifted by the growth of tech companies to the north of the city, and the arrival of pharmaceutical headquarters will help push prices up further.

In 2016 a new rail service from the city to the science park will keep prices rising, and beyond the opportunities presented by the local economy, Cambridge is also part of the 'outer commute' area of London, which Savills expects to shoot up in value over the next five years.


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