October 2020

High tide or just swell? London property market update, October 2020 

The UK enters the last quarter of 2020 with tighter anti-coronavirus lockdown restrictions, including 10pm curfews for bars and restaurants, a renewed exhortation for office workers to ‘work from home’ and the ‘rule of six’ for social and family gatherings. Outside of London, even tighter restrictions are already in place and it may only be a matter of time until they reach the capital. The Bank of England is engaging in heated debate about whether to plunge interest rates into negative territory and the final stretch of the Brexit trade deal negotiations is upon us. Will what the Bank of England’s Andy Haldane calls the ‘unholy trinity’ of rising unemployment, Brexit and the rising number of new COVID-19 cases – pose a threat to the surprisingly buoyant UK property market? Or will ample liquidity, tax incentives and the ‘safe-haven’ appeal of property continue to drive transactions into the year-end?

In this month’s newsletter, we cast doubt on the London ‘exodus’ myth; ask whether commercial property weakness could actually help the residential market; and examine the benefits of home improvements in this market. We were also delighted to publish our new investment report in late September, ‘Black Gold: Opportunities in the London Buy-to-Let Market’.

Busting the London ‘exodus’ myth

As we settle into a renewed bout of remote working, many real estate agents are reporting interest in properties further and further outside of London. According to a survey from Totaljobs, a third (32%) of people in the UK are more interested in living in a rural area now than they were before the pandemic, with 26% of Londoners saying they want to continue working outside of the capital, as reported by HR Magazine.

Some Londoners are moving out of the capital to live closer to family, pushing rural property ‘mini booms’ out to the suburbs and beyond; and others – such as City workers facing flexible working options for the first time – are leaving the Square Mile behind for the Yorkshire Dales or Norfolk coast. The Times reports data from Hamptons International estate agency, showing that Yorkshire is experiencing the biggest boom, with 39% of homes receiving bids from more than three prospective buyers. 48% of homes sell for 2.4% over the asking price, on average – more than most buyers will save from the tax cut, according to Savills.

But what does this mean for the prime London property market? Will a pied-a-terre or a London family residence in a choice location permanently lose its shine? While the idea of working remotely in the quieter corners of the City or being in the thick of a subdued West End may not appeal to many as we enter the darker winter months, all is certainly not lost. Behavioural changes wrought by COVID-19 may lead to a different mix of City and rural living, but the longer-term appeal of proximity to commercial and social hubs will still remain. Central London properties with outside space, spare rooms and walkable commutes should continue to tick a lot of boxes. In fact, central London estate agents are reporting a pick-up in activity, in step with elsewhere in the country. For example, Jackson Stops’ Pimlico & Westminster office saw 55% more transactions in the third quarter than a year ago.

Canny high-net-worth individuals (HNWs) with an eye for the future may be investing in second homes in the countryside to work from throughout the pandemic, with a view to returning to the city once life returns to some semblance of normality; and all are benefiting in part due to the stamp duty holiday.  But as we look ahead to the future – and potentially life with a coronavirus vaccine – Londoners may think twice before selling up in search of the idealised remote, rural lifestyle.

Black Brick Managing Partner Camilla Dell warns buyers not to be too hasty. “In 12 months, we’ll be in a markedly different situation all over again,” she says. “The same kind of social restrictions might not apply, and hopefully – with the promise of a vaccine entering the market – we won’t be subject to the same strict lockdowns. Londoners need to consider whether moving out to the shires is sustainable, long-term; and employers should give careful thought before rethinking their entire hiring strategy.”

Indeed, London real estate activity has been perhaps surprisingly buoyant since the end of the ‘hard’ lockdown, with pent up demand unwinding. Usually, an economic crash of this magnitude would provoke a significant price correction. But in this case, the prospect of sharply higher unemployment is being counteracted by vast amounts of stimulus thrown at the UK economy. With interest rates at record lows (10bps) and renewed QE (£300bn so far), liquidity conditions have remained favourable. Although this buoyancy may fade as rolling local lockdowns take effect and the year-end Brexit deadline looms, the structural case for owning property ‘where the action is’ in Prime London remains.

“The market came back with force after both the global financial crisis and 9/11, and prices rocketed. We’ve seen a similar recovery since the reopening of the property market after lockdown, to the extent that we’ve seen a ‘mini boom’,” Dell says. “Buyers are looking at London’s prime ‘leafy’ villages, with access to parks, such as Hampstead and Richmond. They want good schools, good high streets and areas of outstanding natural beauty to walk through, to break up home-based working.”

How will the ‘Covid commercial property slump’ affect HNW investments?

Rolling local lockdowns and a return to working from home for office workers may affect the residential property market in some unusual ways – through the channel of the commercial property market. Having made their way through six months of home working, only to find that time-period has potentially suddenly doubled, more companies may rethink their office arrangements and space needs. Curfew-style restrictions on pubs and restaurants may also sadly put more of these establishments out of business. And what will happen to this space?

Over time, it may well lead to the repurposing of commercial property into residential, increasing the supply of new build developments in prime locations – with attendant SDLT incentives. This could particularly affect areas such as City of London & Westminster, Mayfair and Fitzrovia, as offices, shops and restaurants change in usage. Opportunities to invest in long-term prize assets in difficult-to-source areas may gradually emerge.

Camilla Dell, Black Brick Managing Partner, believes the Conservative Government’s plans to relax the planning rules that govern the conversion of commercial to residential property could pique the interest of high net worth investors. “These radical changes will lead to more applications for commercial property to be converted into residential property and this could unlock some new opportunities in the sector.”

While potentially driving central London new build supply over the longer-term, current commercial property price weakness could divert some investment flows into the bulk residential buy-to-let market in the immediate future. A consensus forecast based on a survey of 24 large property investors and consultants, by trade body The Investment Property Forum (IPF), recently predicted that commercial property capital values would drop by 12% in 2020. Such gloomy prognostications may already be stimulating the interest of private equity in the commercial real estate market. Those unwilling to call the bottom but still looking for UK real estate exposure may prefer to turn their attentions to residential, rather than commercial, investment exposures. The Prime Central London valuation outlook remains healthy – Knight Frank expect cumulative capital appreciation of 17% from 2020-2024 while Savills forecast 15.7% gains, including only a 2% decline in 2020 itself.

Black Brick Managing Partner Camilla Dell says this raises some interesting questions for where HNWs will likely focus their property investments, going forwards. “We may see increased appetite for residential investment in London’s prime market,” she says, pointing to the fact that sterling’s low levels present a strong buying opportunity for overseas investors. London retains its ‘safe-haven’ status for international buyers despite Brexit uncertainty. Coutts Chief Investment Officer Alan Higgins suggests that the economic fundamentals for the residential sector remain bright. “The key positive factors include relatively attractive levels of sterling for global investors, which make London property look cheap in dollar or euro terms, and the ultra-low interest rate structure worldwide,” he tells Estate Agent Today.

Our recent report, Black Gold, discussed the current opportunities available in London buy-to-let for investors willing to make a commitment to multiple units, and the ways in which Black Brick can help to source and manage those properties.

DIY or DI-Don’t? 

Prolonged periods of home working and nights in over the winter may lead many to ask whether their homes need some additional attention, while those thinking of selling may wish to bolster property values as uncertainty continues to stalk the UK economy. Buyers wishing to make long-term commitments to the London market but facing significant renovation costs may wonder whether it is worth it. Those facing a quieter spell in their professional lives may chose to turn their energies to refurbishing their primary residences. The government’s drive to relax planning permissions may also spur activity, with new rights to add up to two storeys to residential buildings having been introduced in September.

If the actions of 32 million homeowners are anything to go by, we are refusing to let the pandemic get in the way of improvements to our primary properties – there was a 9.9% jump in DIY and household sales between July and August as owners got stuck into home improvement projects, according to the Office for National Statistics.

A substantial recovery in the home improvements and construction sectors may be underway, says Ben Dyer, CEO of Powered Now. “These ONS results are fantastic to see, as more people begin to feel more confident about reinventing their homes. The whole industry is still in ‘catch up’ mode, and projects delayed by the lockdown are taking priority. This has helped to spike demand and we expect it to continue in the short term, as people treat themselves to home-based TLC.”

For those considering a property update or hoping to buy a ‘project’ in the coming months, Black Brick can certainly help. As an example, we were able to source an off-market property in Bedford Gardens, Kensington for a growing family which needed a significant amount of work. The existing owners had successfully applied for planning permission which allowed for the house to be almost doubled in size through a basement extension, developing the side and rear of the ground floor level as well as a loft conversion. The property had an asking price of £5,950,000. We carefully analysed what the costs of works would be, and the potential end value, in order to help formulate our offer. As a result of our negotiations we were able to secure a discount of £1,100,000 (or nearly 19%) and contracts were exchanged at £4,850,000.

Beyond sourcing properties, we can provide independent advice on the cost of renovation projects, the potential value-add to a property, and which renovations would aid resalability. We can both advise on and coordinate renovations, on everything from landscape gardening to managing extensive home improvement projects. In prime London areas, the cost of renovations can usually easily be recouped in more attractive sale prices, but funds always need to be allocated judiciously and to the tastes of ideal buyers to secure the best return.

The Luxury Property Forum Webinar

The LPF Webinar: Investment in the UK Luxury Property Market in a Post Pandemic World on Thursday, 8th October from 10am-11am.

Join Managing Partner, Camilla Dell who will be speaking live at the next Luxury Property Forum Webinar. Camilla will be joined by Priya Rawal, Founder and CEO of The Luxury Property Forum , Uma Rajah, CEO of CapitalRise, Lee Langley, Director and Mortgage and Protection Adviser of OnPoint Mortgage and Sally Maier-Yip, Founder of 11K Consulting Ltd. The coronavirus pandemic and the subsequent lockdown restrictions have resulted in investor caution in the market. However, the pace at which the housing market has recovered across the UK has taken many by surprise. Stamp duty incentives do play their part, but for many it appears the main driver has been the desire to change where they live. As the UK prime property sector emerges out of lockdown, what are the reality of both domestic and international investment in this market? What are the challenges and pitfalls and what does this mean for the short and long term future?

To register to join the webinar – https://www.theluxurypropertyforum.com/upcoming-events