Covid-19 and the future of residential property in the UK

29 Oct 2020

The Covid-19 pandemic has transformed the UK property landscape, catalysing changes to the way we buy, sell and invest. But how many of these trends are here to stay, and what do experts say about the health of the market – now and, more importantly, in the future?

Summary

A rural revival: Long-term trend or flash-in-the-pan?

Desire for proximity to nature is creating a surge in buyers seeking to escape the city. But an increased desire for country living isn’t necessarily a new trend - nor an end to the desirability of London prime.

Is COVID-19 spelling the end of international interest in Prime Central London?

Demand for London’s prime homes has recovered since the first national lockdown, but more slowly than regions outside of the Capital.

A drop-off in activity on the horizon?

The UK needs to consider the impact of a possible economic downturn expected in 2021, but already there are signs that the economy is bouncing-back.

Major political events have property implications, both at home and abroad

Brexit and the US elections will play a part in fuelling the state of the market today and it will also shape the trajectory of the coming months.

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A rural revival: Long-term trend or flash-in-the-pan?

Desire for proximity to nature is creating a surge in buyers seeking to escape the city. Laura Conduit, a specialist residential property solicitor at Farrer & Co., notes a surge in rural interest, saying: “We’ve seen an explosion in the country house market.”
 
But an increased desire for country living isn’t necessarily a ‘new’ trend – nor an end to the desirability of London prime. Back in 2018, Investec’s England’s Prime Property Hotspots pointed to the migration to the countryside as a growing trend amongst high net worth buyers, thanks to interest stoked by improved transport links, civic investments and emerging business clusters.
 
Paddy Dring, Knight Frank’s Global Head of Prime Sales, agrees. “People have realised they don’t need to be in the city all the time,” he says. “So what we’re seeing is an accelerated shift that was already happening anyway.”
 
Experts also recognise that the health of the rural market represents, in part, a booming second home market. “As you move to the top end of the market, clients are investing additionally in the country and keeping both properties,” says Tom Bill, Head of UK Residential Research at Knight Frank.
 
Additionally, experts point out the need to avoid a short-term approach.
1.4%
The increase in prime regional property values above its 2007 peak. [Source: Savills]
3.4%
The biggest increase in value in Q3, seen in the traditional £2m+ country house market. [Source: Savills]
"I would urge caution. In the longer term the boom in the countryside market will have less of a marked impact than we might expect when looking at today's data."
- Tom Bill, Knight Frank
Richard Winter

What I’m seeing is that prime and super prime buyers are purchasing a significant enough second home so that if they want to move to the countryside full time, they won’t need to make another transaction later down the line.

Richard Winter, Owner, Richard Winter Property

 

 

Is COVID-19 spelling the end of international interest in Prime Central London?

Demand for London’s prime homes has recovered since the first national lockdown, but more slowly than regions outside of the capital. The Royal Institution of Chartered Surveyors found that, in September, house price growth was continuing to accelerate in all regions, but noted that “the rate of house price inflation appears to be more modest in London.”
Experts attribute London’s slower recovery to the reduction in overseas purchasers. Jeremy McGivern, Founder of Mercury Homesearch, comments: “There are two very distinct markets, the domestic and the international. You can walk down King’s Road and it's very busy, but you cross into Belgravia and it's very quiet, because international buyers haven’t been able to come to London due to travel restrictions.”
 
However, Paddy Dring of Knight Frank highlights that restrictions haven’t deterred all international buyers. “If an overseas buyer knows that purchasing property in London is in their plan for the future, for example, because a child is due to attend school or university in the city, they’re more willing to buy remotely rather than waiting to view in person.”
 
Indeed, despite the drop in overseas buyers, some areas of prime London real estate have remained buoyant. Prime outer-London locations  – especially the leafy London ‘villages’ – are seeing high demand from purchasers, investors, renters and home-sharers. SpareRoom says it has seen demand for gardens, patios and balconies almost double over the summer. Experts note this as a key consideration for buy-to-let landlords and those looking to extend their portfolio.
 
“Desire to find family homes with gardens and an area to work from in village-y neighbourhoods are off-the-charts,” says Andrew Weir, Chief Executive of London Central Portfolio.
16 out of 20
London ‘village’ areas saw price rises in the last year. [Source: Hamptons International]
7.4%
price increase in Balham, the top ‘super suburb’ by price growth. [Source: Hamptons International]
Jeremy McGiven

The danger is that it is very easy to generalise. A lot of the movement has been due to pent up demand that has built up over four years due to Brexit and ongoing political uncertainty. But London has infrastructure that is hard to replicate. Businesses will continue to gravitate to the city, as will people seeking the best jobs, entertainment and social events. Would it be unreasonable to say that once a vaccine is discovered and London is open that it will continue to be one of the most vibrant cities in the world?

Jeremy McGiven, Mercury Homesearch

Charlotte Seward

Recently, we were able to take a view of a client’s entire residential portfolio to help them take ownership of a new investment opportunity in a London building where they already owned two of the three flats. The lending we provided gave a quick solution and unlocked the possibility of improved planning permissions to add further value.

Charlotte Seward, Private Banker

 

 

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A drop-off in activity on the horizon?

"Thanks to the pandemic we’ve got a more severe economic environment than anyone expected, on top of extremely significant political events. Investors need to be prepared for anything."
Philip Shaw, Chief Economist, Investec
It’s also important to consider the impact of a possible economic downturn expected in 2021. Already there are signs that the economic bounce-back witnessed after lockdown is slowing. According to the ONS, monthly GDP grew by 6.6% in July as lockdown measures continued to ease, following growth of 8.7% in June. However, growth was slower than expected in August, with GDP increasing 2.1% from July, compared to its 4.6% forecast.
Andrew Weir

The Job Support Scheme will come to an end in the future so we can expect unemployment to rise. Alongside uncertainty over the impact of the second wave, it’s possible that the next six months will be more unpredictable than the last. There are however four significant calls to action which should not be overlooked. Firstly, the stamp duty holiday ending in March 2021; then there is the anticipated 2% additional surcharge for overseas buyers; the current discounted prices in the market compared to its peak in 2016; and, lastly, the added appeal of attractive sterling exchange rates.

Andrew Weir, London Central Portfolio

Tom Bill from Knight Frank notes that a second national lockdown wouldn’t necessarily alter the prime market’s recovering trajectory. He says: “Yes, the pause button could be hit again, but it would be a pause rather than anything wider than that.”  

Major political events have property implications, both at home and abroad

Brexit has played a part in fuelling the state of the market today and it will also shape the trajectory of the coming months. Analysis from the London School of Economics shows that, if measured in terms of the impact on the present value of UK GDP, the effect of a no-deal Brexit could be two to three times greater than that of the COVID-19 pandemic.
 
Meanwhile, albeit further afield, the results of November’s US presidential election, although likely to be more of a short-term effect, may impact buyers holding US dollars and looking for UK property.
Chris Duck

A UK-Res-Non-Dom found their dream home in London in the midst of lockdown. Using our experience of working with legal partner clients who receive profit distributions, we developed a bespoke solution coinciding repayments with liquidity events.

Chris Duck, Private Banker

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Summary: slow but tangible recovery in the prime market, but turbulence still to come

So what conclusions can we draw as to where the market goes from here? While it is impossible to make any concrete predictions  – we remain, after all, in a period of incredible upheaval and uncertainty  – our experts point to some of the key considerations for buyers, sellers and investors to be aware of.
 
Thanks to pent-up demand and a range of ‘mini-booms’ in leafy London villages, London prime property remains buoyant. Furthermore, experts express confidence in the resilience of the capital’s prime market. “London property still retains its enviable status as a safe haven for tangible alternative investment,” says Andrew Weir of London Central Portfolio. “The attraction of the GMT time zone, the global business language, rule of law, world-class education institutions and a liberal culture continues to appeal to a global audience of high net worth individuals.” General consensus, though, is that we should expect to see a new balance of rural and urban living for some time to come.

 
For long-term value, buyers and investors may want to consider what makes a future-proof property, in order to avoid taking a short-term approach. This could mean ensuring a residence offers green space and a home office for flexible workers, while also retaining proximity to transport links to maintain easy access to the city.
William Scoular

The resilience of the UK real estate market has been very encouraging. As we enter into an extended period of uncertainty we remain focused and committed to meeting our clients’ needs, as the property market remains open for business.

William Scoular, Investec Structured Property Finance

Your future home

Desirable characteristics of properties for prime buyers following the pandemic, according to Strutt & Parker’s Future Home survey with OnePulse. May 2020.

When it comes to wider political events, volatility may be unavoidable but experts are certain that opportunities will emerge. While lockdown may have created a competitive advantage for domestic buyers, due to travel restrictions stymying international interest, overseas purchasers may benefit from currency fluctuations.

“The event of a no-deal Brexit may weaken the pound, meaning there would be greater investment opportunity for international buyers,” says Hannah Aykroyd, Managing Director of Aykroyd & Co.

Despite the uncertainty posed by the political landscape, our experts note the continued perception of the UK property market as a relatively stable investment. As Knight Frank’s Paddy Dring, says: “Even taking into account the effects of COVID-19, and the risk of a second lockdown, the confidence in property as a safe asset class is still very much a reality.”

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