On 5 November, Nedbank Private Wealth (NPW) held its annual review of the London market for residential property. We were joined by Marcus Dixon (MD), head of research and data analytics at LonRes, and Simon White (SW), the managing director and founder of London’s Surveyors and Valuers. Marcus brings an unparalleled suite of data and research on the Central London market and is regularly quoted in the press, while Simon has over four decades’ experience in the London property market.
The 45-minute session (a recording of which can be accessed here) examined what our presenters have seen in recent months, what they thought the coming 12 months has in store, and flagged the opportunities they think might present themselves for buyers and sellers alike.
SW: The past few months have thrown up challenges beyond anything of their kind. My experience dates back to the 1970s and ‘the winter of discontent’, but this is a completely different scenario. My overriding piece of advice for clients is to focus on the long term. Despite current concerns, a home close to a tube line has always commanded a premium and will continue to do so.
Far too many people are making important decisions based on short-term conditions and issues. London is likely to continue to do well – and still offers a lot of advantages for local and overseas buyers – remaining an attractive location for those who take a long-term view given the UK’s rule of law, stability and education system.
In the short-term, however, the market has been very focused on particular property types and specific locations. As such, areas like Battersea, Clapham and Wandsworth remain popular given the demand from local families, whereas South Kensington is down by as much as about 20% due to a drop in demand by European bankers and overseas students.
MD: Our data shows we effectively have a two-speed market. Family homes set in areas with green spaces are proving popular for domestic market sales and rentals. In addition to the areas Simon has cited, I’d add Fulham, Parsons Green and Notting Hill to the list. Family homes with gardens are also doing well and these tend to be further out of the centre.
We’re also still seeing lots of pent-up demand following the first lockdown for a change of lifestyle. This is often for homes outside the centre of London. Relying on this pent-up demand from the first wave is a risk as we move into 2021 as I am not sure there is enough demand from this alone to carry us through to next summer.
What are less in favour are the areas of prime central London that are usually disproportionally in demand with overseas buyers, and flats – with the exception of flats with their own access and garden – which are off by an average of 15% to 20% from peak levels. People aren’t travelling to the UK and few are going to make a significant investment without seeing the property and the surrounding area for themselves.
This is also the case for high-end flats, and especially those in new developments. As well as appealing to a higher proportion of overseas buyers, many of these developments have shared amenities, e.g. gyms, pools, wine rooms etc. These contribute to higher monthly service charges, yet many of these facilities are out of bounds or just less desirable during a pandemic.
NPW: One of the trends we have been seeing with some clients is that they have, perhaps, had the main family home in London and a smaller holiday home within an easy drive of the capital. These are now being switched to a pied à terre in London and the larger family home being purchased in a more rural setting with more space – both inside and out. We are encouraging clients not to leave the capital completely though, as we believe that after the virus is not impacting life as it is now – and that should be a ‘when’ rather than an ‘if’ – people typically find it tough to move back to London given the different dynamics affecting the property market here rather than elsewhere.
MD: While there is often a wide variety of different types of property across every London borough, there have been some broad trends, which we’ve captured in this chart.
Source: LonRes
Simon mentioned South Kensington before, but other areas, particularly those with a high proportion of flats, or that appeal to a greater number of overseas buyers, such as Mayfair, Westminster, Belgravia and Knightsbridge seem to have also struggled. The opposite is true of areas such as Notting Hill, St Johns Wood and swathes of South West London where demand has increased from domestic buyers.
And while I can see property norms reverting to pre-pandemic life in 12-18 months, I could see a trend whereby fewer people are working full-time in the office and, as such, offices could get smaller. In this instance, commercial properties may see a change of use to residential, although I’d question the demand. Yes, these could be suitable for flats, but many don’t have any outdoor space.
SW: Some commercial properties would be easy to convert. While Mayfair is suffering at the moment, there are at present many former houses that have been converted into offices, which it would be relatively straightforward to reinstate back to family dwellings or to convert into flats. This is also the case in Holborn, where there are only about 20 to 25 houses at the present time while, on the other hand, there remains a significant potential locally, given how relatively straightforward it would be to reinstate former town houses, currently used as offices, back into residential use. This is even more relevant at present given the recent trend for home working.
While I said it in 2019, I still see sense in people looking anywhere along the Elizabeth Line, and locations along the Northern Line, e.g. Kennington, Peckham Streatham, Stockwell, i.e. places with gardens and good commuter links. And there are areas – such as Old Oak Common to the west of Hammersmith which is London’s last great swathe of undeveloped land and is soon to be redeveloped, thereby representing a significant long-term potential.
SW: I have raised issues before about new builds given the huge premiums they typically command. For me, it’s the same as buying a BMW 7 Series and, as soon as it’s driven off the forecourt, the price drops dramatically. They are also too often too similar – Nine Elms, for example, must have about 3,000 two-bedroom properties on the market – and this means buyers have no need to make a decision, given how saturated the market is and since there will also be a similar property for sale very nearby.
And new builds quickly become ‘old’ new builds, but haven’t always appreciated enough to offset the new build premium. Ten years on, you need to renovate and this may not be very cost effective, aside from the logistical issues of renovating in a block of flats – where, for example, can you put the skip? It’s particularly a high-risk undertaking if other new builds are going up in the area and/or quality period stock is available nearby.
CC: There are also big issues with buildings with cladding. Since the Grenfell Tower tragedy, scammers have duped thousands into signing off fake EWS1 forms (the forms needed before a flat can be sold where a building has cladding). This has not only had implications for those that have been duped, but it has further depressed a section of the ‘new’ build market that is actually quite sizable.
And this isn’t the only area that we’ve seen scammers seeking to use the pandemic to extort money from individuals. We are constantly seeking to ensure we support our clients and protect their assets from fraud.
MD: Some people have been making significant lifestyle decisions based on something which is (hopefully) a short-term issue. While it is not so easy to see now, once life returns to normality, I still expect most people will be required be in the office more regularly. At the moment, people are working from home and so they dream of space – both inside and out. But the reality of commuting one or two days in the summer months is very different than three to four days in the depths of winter, when you are waiting on a draughty train platform for the one train an hour that stops at your station.
SW: London is very quick to adapt to trends and the market is being driven by the dual effect of the pent-up demand post the first lockdown and a desire to benefit from the stamp duty holiday. And you can see why people are struggling to see the sense of paying a premium for a location close to their office when their office is closed. But once offices are open again, people will remember the benefits in terms of sharing ideas, training options and the ability to mentor staff. In my sector, 20-30 years of experience is really needed before you understand the ins-and-outs of the London property market, and that’s difficult to do over a video call.
NPW: The first lockdown was very draconian. People couldn’t view properties, surveyors couldn’t inspect them and lawyers couldn’t complete their searches. In reality, the services related to property buying and selling can all be made as safe as is practicably possible with the right social distancing and cleaning. The second lockdown has a much shorter list of things you can’t do.
Of course, the reality is that we could see lockdown restrictions expand if we don’t get the current wave of infections under better control.
SW: It’s hard to really appreciate the true influence of the stamp duty holiday as it came into force just as the pent-up demand from three months of lockdown started to be released. And, while it will encourage the lower end of the market, the demand has pushed up prices so the tax savings are offset. At the higher end of the market, a saving of £15,000 is not really going to tip the balance too often when the sale is £5 million or more.
MD: Before this new lockdown, while there had been a push for an extension to the 31 March 2021 deadline, it had been largely dismissed. With the new lockdown and the realisation that a vaccine won’t be distributed before Christmas to large swathes of the population, there could be a review – as we saw with furlough being extended. In addition, property transactions also take time to progress – even in normal situations – so the beginning of November was already seen by many in the industry as an initial line in the sand. With this new lockdown and since we were heading into a quieter time – no one wants to have people in their house while there are Christmas decorations up –it’s not an unlikely scenario to see an extension.
SW: Over the years, we have seen a number of new initiatives try to reform property taxation – such as the poll tax or bedrooms tax – with little success. The only enduring one has been stamp duty, which was introduced in 1696 to pay for a war against France. I can see the idea of a mansion tax not gaining very much ground, as this was promoted by Jeremy Corbyn, and so it is unlikely to be taken up by Boris Johnson.
If anything, I could see some changes to council tax. At the moment, a house worth £10 million is typically only paying some £2,500 a year in council tax. The chancellor could very easily do something with the top band and cause very little upset.
MD: Simon mentioned before that stamp duty isn’t going to have much of an influence on the higher-end of the property market, given the sums involved, and the same is the case for the pending 2% additional surcharge, although it may prompt a bit of a rush ahead of its 1 April 2021 introduction. However, as this chart shows, we can also see the impact of currency fluctuations on the market.
Source: LonRes
Essentially, over the past six years, property prices in prime central London in US Dollar terms have fallen by US$1,150 per square foot, or 37%. As such, while the additional stamp duty will have a place in people’s minds, there are options to make up that amount by using the currency market fluctuations to your advantage.
CC: We have seen some overseas clients who are looking to buy, but have not yet had chance to see (or find) a suitable property. However, they are seeking to take advantage of the currency fluctuations by speaking to our treasury team and getting a sense of movements based on what’s going on in markets, and where investors may want to lock-in a future-dated transfer into Sterling.
SW: I think it is having limited impact. While a no-deal scenario results in lots of issues, these again will eventually be resolved and, again, people should focus on a long-term timeline when buying property. Let’s face it, it’s also been an issue that has been around since 2016.
NPW: One way Brexit could suddenly have a much greater bearing is if we see a no-deal scenario come to pass. We are being told that the odds could be a 50-50 chance of a hard Brexit and, as such, clients may want to take advantage of the inevitable pressure that Sterling would come under and which would offset increases in the stamp duty levy – either from the additional rate being introduced or the end of the scheduled holiday.
NPW: While Biden has implications for US and global stocks, as well as US treasuries, we don’t see huge trends stemming from his projected victory. In fact, a Trump re-election may have had more ramifications as individuals may have felt compelled to leave the US and move to the UK due to the divisive nature of his rhetoric.
And unless Biden manages to pick up the two seats seeing a runoff in Georgia in January 2021, he would not have control of the Senate and so be unable to push through much of his agenda.
MD: Lockdown has had a far bigger effect on the rental market than the sales side. The number of new sales properties reaching the market fell more significantly over lockdown than lettings, meaning that there is currently 80% more stock on the market to let than at the same point a year ago. With the number of new lets running between 10% and 20% below 2019 levels this has meant rents have fallen. Clued-up tenants are asking for reductions in their rent, in some cases up to an optimistic 25%, but rents are on average 10% lower than they were a year ago.
SW: One thing to watch will be the push to abolish, or suspend, the right to evict tenants, i.e. Section 21. While this is less of an issue higher up the market, we are seeing a real impact on landlords of lower value properties as they just can’t evict tenants. It could put landlords off buying and renting.
MD: For me, it’s to encourage people to ditch the view that renting is pouring money down the drain. If you have taken yourself out of London due to the pandemic, try renting for the next 12 months. You can assess whether the property and its location are right for you now, and in the foreseeable future, as well as avoid any fads that are prevalent in the market at the moment. Property transactions are expensive and, as mentioned, it’s tough to move back into London once you’ve left.
SW: Of course you’ll see why I’m saying this, but pay for a quality surveyor. They’ll be able to really help you check that the property is sound and also help you ensure that the price being paid for a property is fair. Many valuations can be based on a pound per square foot method that can result in an unrealistic figure and the experienced surveyor then has to stand back and take a view – does the figure look realistic he or she needs to ask.
NPW: Last, but not least, it’s worth taking a step back and asking if the property purchase makes sense for you and your family for the medium to long term. There has been the assumption that property prices always rise. They don’t, and at a time when many people are questioning aspects of their lives, seek advice and don’t be afraid to pull out. While as a UK seller, the lack of a legal contract until you are almost at the end of a process is a downside, it should be seen as an advantage as a buyer.
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Simon has been a qualified chartered surveyor for over 35 years and has managed London’s Surveyors & Valuers since its inception nine years ago. He brings a wealth of experience to the table and there isn’t much he hasn’t seen in the world of London property.
Over the years, Simon has valued underground houses, houses in the Thames accessible only by boat, and the odd haunted house – a more regular occurrence than you may imagine. He likes golf, fine wine and progressive rock.
With over 17 years of experience, Marcus is one of the propery sector’s leading residential housing analysts. Marcus joined LonRes as Head of Research in 2015, specialising in analysing and reporting on London’s prime housing market. Marcus regularly appears in both the national and industry press.
LonRes is a platform for an exclusive network of 6,000+ well-known and established property professionals. LonRes offers unique, real-time data on London’s sales and lettings markets and benefit from the most comprehensive archive of London’s properties in the market.
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