May 2020

Peering into the gloom

More than a month into the Covid-19 lockdown, and thoughts are turning, increasingly and inevitability, to what comes next. Pity the poor analyst whose job requires them to put down a marker as to what they think will happen – to the stock market, the price of oil, the euro/dollar exchange rate – as we emerge into a post-Covid economy.

There are lessons from the past that can be applied to the current crisis, but it also has unique characteristics. And with most markets in suspended animation, there is almost no current data from which to extrapolate. But some analysts have sought to meet the demand from their clients for some clues as to what happens next.

Perhaps most bullish is the prediction from estate agent Knight Frank that Prime Central London prices will hold steady in 2020, before roaring ahead 8% next year. It accepts that transaction levels will be depressed but, assuming a relatively short lockdown – with a gradual lifting of restrictions from June – it expects the impact of Covid-19 to be relatively muted.

Its rival Savills is less optimistic. Across the UK, it suggests that “short-term price falls could be in the order of -5% to -10%, but on very low levels of transactions”. However, its analysts also expect the pandemic to be less impactful than other recent downturns. It suggests that, assuming a relatively rapid economic recovery, the pandemic will “have a more limited and shorter-lived impact on house prices than either the early 1990s recession or the Global Financial Crisis” of 2007-08.

The firm is also holding to its five-year forecast, which sees Prime Central London property rising 20.5% over five years.

Its director of residential research, Lucian Cook, gives five reasons why the current crisis could be less serious for the property market: “The causes of this downturn are entirely different; the relatively low levels of price growth in the run up to current events; the fact that we are starting from such very low interest rates; the Government’s swift response to protect jobs and earnings over the short to medium term; and lenders’ flexibility around mortgage arrears.”

Among other things, these measures will dramatically reduce the number of forced sellers, while low financing costs will help spur transactions, the analysts believe.

However, at Black Brick, we think these forecasts are overly optimistic, and may be the result of biases – whether unconscious or deliberate – of the firms who produce them, given that estate agents have an incentive to talk up the market.

“Our feeling is that agents are taking a really rose-tinted view of the market,” says Black Brick Managing Partner Camilla Dell. “It is very difficult to understand where things are, and whilst we agree that there is no real evidence that prices have fallen, that is because there are very, very few transactions.”

“Where the market comes out depends upon a number of questions that no-one has the answer to at the moment,” says Black Brick Partner Caspar Harvard-Walls. “Price falls will depend upon how quickly we come out of lockdown, and how we come out of lockdown. If there is considerable ongoing economic disruption, that will weigh more heavily on prices.”

However, when the lockdown measures ease, and transactions begin to move again, Dell suspects that vendor and buyers expectations are initially likely to be adrift. “Regardless of what vendors think, there is not a single client we’ve spoken to that would be happy to transact where the market was in January,” she says. “Buyers expectations is that the market in Prime Central London must have come down as a result of the pandemic.”

This gulf in expectations is likely to lead to “lots of Mexican standoffs”, where neither buyer nor seller are prepared to budge. “It’s going to take some time for vendors to get aligned with buyers’ expectations.”

She adds that transactions will happen – with sales triggered by death, debt or divorce, or by developers under pressure to make sales. “We will see them going through at anywhere from 5% down on January to as much as 15%,” she predicts.

The challenge for buyers will be finding sellers that need to transact, says Harvard-Walls. “It will all be about identifying motivated sellers,” he says. “That’s where a buying agent can really come into their own.”

Another advantage offered by a buying agent will be advising on fair value in what is likely to be a dislocated market, with relatively few transactions generating data as to where prices stand. Dell notes that several firms that provide price indexes, such as Rightmove, have suspended publication of them, due to a lack of transactions. “Having a trusted advisor will be more important than ever,” says Dell.

Lining up for the end of lockdown – wealthy buyers are on the hunt for opportunities

No matter how disruptive to the London market Covid-19 will turn out to be, transactions will restart and the market will return to something like normality. Along the way, there will be opportunities for the taking by well-prepared buyers. In April, we have taken several new enquiries from wealthy individuals, and funds preparing to make a swoop on potential deals when they arise. So how should prospective purchasers be positioning themselves to take advantage?

Some clients may have already found a property they like, before the Covid-19 lockdown put the process on hold. The vendor may wish to continue to market the property, or it may have proved impossible to undertake a survey and searches. “In those cases, we are encouraging our clients to try and get a sales contract in place,” says Dell.

In the UK, such contracts – which set out an offer price and a timetable to move to completion – are not binding before exchange, but they can help to put the buyer in control of the process rather than sitting on the side-lines waiting for the lockdown to end.  Dell continues, “With Zoopla recently reporting that there is a pipeline of 373,000 property purchases worth £82 billion currently on hold, combined with the likelihood of reduced stock levels, it’s very possible that we could see a severe lack of stock by the autumn. It’s therefore crucial that buyers who have found a property they want to buy but have not yet exchanged contracts, do all they can to be at the front of the queue when lockdown measures are eased.” 

Similarly, some agents are drawing up viewing lists for properties on the market but for which in person viewings are currently impossible. “Given the current lack of activity, and how demand is likely building up, there will certainly be a surge once lockdown is lifted,” notes Harvard-Walls. “Buyers need to be aware that, as always, best-in-class properties will be highly sought after, regardless of the wider economic situation.” 

Harvard-Walls also speculates that the Covid-19 lockdown might change patterns of demand for property, putting a greater premium on space and possibly encouraging a move out of cities to less congested and polluted areas. “It will be fascinating to see whether we see people’s priorities change. Will a garden become more important? A home office? I think these basic needs will rise up buyer’s ‘must have’ lists in future.”

Taking the pulse of the rental market

Clients with rental properties will be looking nervously to the likely impact from Covid-19. While the rental market tends to be more resilient than the sales market in a downturn, it’s not going to escape unscathed.

“Typically, the rental market benefits from a weak sales market, as nervous potential buyers choose to rent rather than buy,” says Dell at Black Brick. “However, the rental market hasn’t been immune to the pandemic.”

According to figures from Zoopla, demand for rental properties fell 57% in the last two weeks of March, compared with a 70% drop in buyer demand during the same period. However, demand for rentals recovered some of that lost ground, rebounding 30% in the following two weeks.

“The rental market is likely to recover faster than the sales market,” says Dell, noting that tenants are able to secure tenancies with delayed move-in dates and are also more likely to rent a property based on a virtual viewing.

However, the Covid-19 pandemic is likely to trigger changes to the market, which may persist for some time. “We are already seeing a fundamental shift away from short-term lets and the use of portals such as AirBnB towards longer term tenancies. Tenants want security and may be afraid of a second wave of infections and another lockdown.”

The likely lack of tourism over the summer months will hit the short-let market, hard. “This could in turn lead to more rental stock being available, and downward pressure on rents,” says Dell.

“How rents perform moving forwards will also depend on the wider economic landscape post lockdown,” she adds. Knight Frank is predicting that rental values will rise by 10% in Prime Central London and 11% in Prime Outer London in the five-year period to the end of 2024. “Our current view remains that the disruption will be relatively short-term and, indeed, developers are still pursuing land opportunities,” it says.

In the meantime, we expect rental increases to be unlikely (Knight Frank is predicting zero growth in 2020). We are seeing a number of clients to our Property Management service agreeing tenancy renewals or extensions at existing rates. “During April, across our management portfolio, we agreed 7 renewals, all maintaining the same rent, and 2 new rentals. Maintaining existing rents is both the ethical thing to do, given the uncertainties many tenants are facing, and also sensible, as marketing rental properties during the lockdown will be challenging – although not impossible. Our renewal activity also shows the importance of having properties professionally and actively managed. Tenants are far more likely to stay and agree to keep paying the same rent where properties are professionally managed, and our renewals undertaken in April are a testament to our high level, personal approach property management service”, says Dell. 

Managed sale of the month – Abingdon Road, Kensington, W8 – £5,400,000

Despite lockdown we are delighted to announce the completion on one of our managed sale properties in Kensington. Our overseas client had purchased a house in Kensington for family use more than 10 years ago but it was no longer required. He was keen to sell, despite the challenging sales market given the uncertainties over the Brexit outcome. The property had been vacant for some time, and there was a long list of outstanding maintenance issues which needed to be addressed.

We recognised the importance of presenting the house in its best possible state before any viewings, so we worked through the maintenance issues and also recommended that our client use the services of a professional staging company who then furnished the entire house with stunning furniture and art. Once this had been done, we then made our network of fellow buying agents aware that the property was available off-market.

We received an acceptable offer from only the second viewing, with a completion date set for April 2020. Even though this coincided with the coronavirus crisis, we were able to move the process through to ensure that completion happened on schedule.