London prime property prices housing
Prime property in central London is expected to withstand the effects of a Brexit in the EU referendum Getty

Property prices in the prime central London market are softening because of the recent tax rises, global economic turmoil and political uncertainty surrounding the EU referendum next week (23 June) — but a Brexit may send values soaring again.

London Central Portfolio (LCP), a firm that manages investment funds targeting the city's high-end property, said in its quarterly review of the market for the first three months of 2016 that the average price rose by 4.7% over the year to £1,673,906 ($2,390,530, €2,124,320), down from a long-term average of 9.1%.

This compares with an average price for Greater London of £600,076 and for the UK, excluding London, of £235,844.

Transaction volumes were up by 33% in the first quarter to 4,996, reflecting a rush of activity to purchase property before April's introduction of a 3% levy on top of basic stamp duty rates for additional homes, a move aimed at cooling off demand in the buy-to-let market.

"Prices are expected to soften as transactions plummet following the Q1 stampede and as tax changes continue to hold back the upper end of the market," said the LCP report. "This is being compounded by pre-referendum jitters and global economic uncertainty as international investors face struggling stock markets, unstable oil prices and an unsettled Chinese economy."

Several polls suggest the leave campaign has taken the lead in the EU referendum debate, with a large chunk of voters still undecided. If there is a vote to remain, LCP said there would be a steady return to the status quo, perhaps taking a year, and prime property prices would harden. But if there is a vote to leave, rather than the bottom falling out of the prime market, which is heavily reliant on foreign investment, the opposite could happen.

LCP said just 12% of prime buyers are from Europe. Moreover, what attracts foreign buyers to London — the liberal culture, rule of law and excellent education system, for example — would be unaffected by a Brexit.

"From a property perspective, this will remain attractive, whether or not the UK is an independent power outside the European bloc," said LCP. "This year, Brexit uncertainty has driven sterling to lows not seen since the global credit squeeze. US dollar-denominated investors, such as those in the Middle East, for example, have been enjoying discounts of more than a fifth, more than cancelling out the recent increases in UK property taxes.

"Further devaluation of sterling and a cut in interest rates — the most probable result of an 'out' vote — should actually increase London's attractiveness to international investors, creating a tailwind for foreign buyers coming into PCL [prime Central London]."

Several banks forecast sterling to drop by as much as a fifth if Britain votes to leave the EU.