State of the Property Market

Posted on 01 July 2020

With the UK Property market having been open for the last few weeks, agents and property portals have reported record levels of buyer interest, a surge in the rental market, high demand for country properties and early signs of a 'V-shaped' recovery. At the same time as we begin to assess the economic cost of the COVID-19 pandemic, many commentators are predicting a recession or depression 'the likes of which we haven't seen' (Rishi Sunak to the Lords Economic Affairs Committee, May 2020) and a crash in the property market. 

At Mishcon de Reya we can see the first green shoots of a recovery but think it may be some time before the prime and super prime markets show the levels of activity that we saw in January and February of this year.

Below we outline our key observations on how COVID-19 has affected the UK residential property market and consider practical steps for potential buyers.

The Impact of COVID-19

Towards the end of 2019 and in the early months of 2020 there was a renewed optimism following a clear general election result and progress on the UK's Brexit deal. This was reflected in the property market with transaction volumes in prime hot spots like Mayfair up by as much as 25% year on year in the first three months of 2020 (Wetherell Market Update, May 2020). It seemed that the 'Boris Bounce' was real and in that context there's no doubt that COVID-19 had an immediate and startling impact.

When lockdown was announced on 23 March new instructions slowed almost instantly and the majority of existing transactions either went on hold or, in our experience, proceeded with significant price reductions with buyers looking to 'share the risk' with sellers. This drop off in demand is reflected by HM Revenue and Customs data which shows that completed transactions in April 2020 were down 53.4% when compared against April 2019 and down 46% compared with March 2020.

Once over the initial shock of lockdown we found that both buyers and sellers were keen to transact if they could find a way to do so safely and in early April we concluded the sale of the second largest residential property deal in the last 12 months. We believe this is reflective of a long term confidence in the London market and in property as a store of wealth in uncertain times.

A V-Shaped Recovery?

While transaction volumes and prices had begun to pick up pre-COVID-19, the past five years have seen the UK's prime and super prime markets suffer as a result of substantial increases to property taxation and continuing political uncertainty. A V-Shaped recovery implies a high starting point but the reality is that the UK market had been quiet for some time. 

The good news for sellers is that a lower starting point means there isn't so far to fall. Savills and Knight Frank are currently predicting prices will drop 5-10% this year across the mainstream market and their research suggests that expectations in the prime market have adjusted by less than 10% (Savills blog, May 2020). In the longer term both Savills and Knight Frank are predicting compound price growth of up to 15% over a 5 year period suggesting that residential property remains a safe investment (Knight Frank UK Residential Market Forecast, 2020-2024).

Our view is that it is simply too early to accurately predict what will happen to prices and transaction volumes over the next 12 months.  As yet no one knows the true cost of the pandemic or the impact it will have on businesses, high net worth (HNW) and ultra high net worth (UHNW) individuals.

With the gradual easing of lockdown and next year's 2% increase in stamp duty land tax for overseas buyers there is reason to think that transaction volumes will increase towards the end of 2020, but until then we expect recovery to be steady rather than spectacular.

A Quiet Market

Both The Guardian and The Telegraph predicted that one of the immediate impacts of COVID-19 would be a surge in demand for country properties with buyers looking to escape from the city and isolate away from the crowds. To certain extent this tallies with our own experience as we have recently acted in the sale and purchase of three country estates each with impressive stately homes as a centre piece. However, all of those deals were agreed immediately prior to lockdown and the buyers were UK based. While UK buyers may well be interested in country properties Highgrove International  points out that for most HNWs and UNHWs country homes tend to be 'second tier' interests and are unlikely to be a priority for most international buyers. Given that and the current difficulties in travelling to the UK there may be a cooling in the market for prime country properties.

Similarly the super prime market in London is likely to remain quiet in the short to medium term.  Although selling agents have shown great ingenuity in adapting to the 'new normal', with virtual tours and socially distanced viewings, it is a fact that a significant proportion of their potential buyers cannot get to the UK without substantial restrictions being placed upon their movement and others simply won't want to travel. At the very top of the market purchases tend to be discretionary and unless buyers are able to see and fall in love with a property it's unlikely they will take the plunge. There will be some activity at this level in the coming months, where buyers are already familiar with a property and/or where there is an element of distress forcing a reduced price that, when coupled with a weak pound, makes a deal too good to ignore. We have a number of clients waiting for these opportunities and, when they come up, the ability to transact quickly will be paramount. Those deals are likely to be few and far between while the cost of borrowing remains low and today there will be relatively owners of super prime property in immediate need of a sale. As the economic fallout from COVID-19 crystallises, we would anticipate that luxury developers will look to off load stock and there will be an increase in sales from owners looking to raise capital for business endeavours.

Pockets of activity

Notwithstanding some inertia at the top of the market we have seen significant activity since reopening particularly in the £2 million to £10 million price range.

There remains an expectation gap with sellers unwilling to substantially reduce prices and buyers expecting a post COVID-19 bargain but it appears that in many cases parties are finding a middle ground.

So far the majority of new deals have been for personal use in areas of traditional strength ranging from a town house in Belgravia, apartments in Kensington and a quirky refurbishment in Islington. 

As the market opens up properties with access to outside space, whether it be a garden, a terrace or immediate proximity to a park are likely be at a premium with half of UHNWs surveyed by Knight Frank in their recent Wealth Report citing proximity to a greenspace as a consideration when deciding where to buy. It may also lead an increase in popularity for areas like Hampstead Garden Suburb and St John's Wood, where outdoor space can be purchased at an attractive price relative to Kensington and Mayfair (Black Brick Property News Bulletin, June 2020).

Is now a good time to buy?

For international buyers there is the obvious opportunity to capitalise on the weak pound and a depressed market and for UK buyers now might be a good time to secure a property that would otherwise be the subject of considerably more attention.

Buyers shouldn't expect huge discounts while borrowing remains cheap and there are relatively few properties on the market. Similarly Seller's cannot expect a substantial premium in the middle of a global recession.

What does seem clear is that, relative to other investments, UK Property is less volatile in the short term and likely to achieve a reasonable return in the medium to long term. With the added benefit that it can be used and enjoyed for as long as it is owned.

 

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