Alpa Bhakta, CEO of Butterfield Mortgages, looks at the prime central London property market where transactions made a strong start to the year but that has now changed. It’s difficult to predict the future but Alpa remains positive.
When Covid-19 lockdown measures were first introduced in March, businesses large and small were forced to change the way they operated, the services they provided and the manner in which they engaged with clients.
Now, over a month since these lockdown measures were first introduced, it seems as though organisations have, for the most part, adapted to this new climate.
For real estate, social distancing regulations have forced construction sites to temporarily close, compelled sellers to take their property off the market and brought the majority of existing transactions to a standstill.
House prices
Should the UK remain in a state of lockdown for the coming months, there are fears that the rate of house price growth could drop significantly. Cebr recently announced that house prices in the UK will fall by 13% by the end of 2020 as a consequence of Covid-19.
Of course, there is a natural propensity for forecasts to take into account worst case scenarios. We received similar projections in the lead-up to the 2016 EU referendum. One month before the vote took place, HMRC warned that house prices would drop by at least 10% should the UK vote for Brexit, and as much as 20% two years following the vote.
Evidently, this proved not to be the case, showing why we should be critical when assessing how certain future events will affect demand for real estate. This is also true when we consider how different sectors of the market are performing, like prime central London (PCL) property.
Strong start to 2020
The PCL market was in a strong position at the beginning of 2020. Knight Frank recorded more transactions in prime central London property in the two weeks following the election than it had witnessed since December 2016. As a result, it anticipated a significant rise in PCL transaction activity over the course of 2020.
Covid-19 has now brought many of these early projections into question. Transactional activity has slowed, but this is not due to a lack of demand.
In reality, prospective buyers are simply not in a position to act on their investment intentions due to the obstacles posed by the pandemic. In this sense, the rate of PCL house price growth is likely to slow, as should be expected given the current circumstances.
The question, and bigger fear, is whether Covid-19 will have a long-lasting impact on demand for real estate. Will investors be deterred from UK real estate or will they simply continue to act with the same enthusiasm displayed at the beginning of the year?
Optimistic future
There is good reason to be optimistic about the future. If Brexit has taught us anything, investors will only act confidently once certainty has returned to the market. Boris Johnson’s victory in the 2019 general election was this breakthrough moment previously, and I am confident a similar event will trigger a second surge of investment activity across the wider property market.
This view is shared by global real estate provider Savills. Having reviewed its five-year projections, it remains confident that average UK property prices will increase 15% by 2024 even with the uncertainty surrounding Covid-19. This is an impressive rate of growth, even if it reflects residential real estate instead of just PCL market.
The situation regarding Covid-19 is constantly changing and there is still no indication of when the current lockdown measures will be lifted.
At this moment, it is difficult to make any bold predictions about the future, but we should not let negative speculations overshadow the positive performance the PCL market displayed at the beginning of the year.
Once Covid-19 has been contained and lockdown measures rolled back, I anticipate an increase in property transactions taking place.
Source: Mortgage Finance Gazette