So long, farewell…2020! - BlackBrick Property
As we approach the end of 2020 – a true ‘annus horribilis’ if ever there was one – there is still some time to reflect on the ups and downs of this year, and to look ahead to better times in 2021 as Covid vaccines are hopefully rolled out across the globe.
‘Highlights’ of 2020
It may seem somewhat strange to point to ‘highlights’ of 2020 given the completely unprecedented and disruptive nature of events this year, but it has certainly been an extraordinary and often unexpected rollercoaster for the property market.
The cocktail of the pandemic, intermittent lockdowns and powerful fiscal stimulus have created bifurcated pricing trends by property type and region. Transactions have surged ahead of the March 2021 stamp duty deadline, driven by domestic buyers, putting strains on the creaking architecture of the UK property market.
Black Brick started the year with a view that Prime Central London price expectations were too conservative in some areas and noted a build-up of pent-up demand. In Q4 2019, we registered twice as many applicants compared with the same period last year. The average budget per applicant had also risen, from £4 million to £6.35 million.
Table source data: LonRes
While the ‘Boris Bounce’ was quickly superseded by the dictates of the emergency response to the pandemic, a cocktail of plunging interest rates, a surge in Bank of England QE asset purchases, still-weak sterling and a stamp duty holiday created a very active market in 2020.
“This year, the market surprised by its resilience in extraordinary times. Buyers have had to navigate pandemic lockdowns, travel restrictions and the timing of fiscal incentives,” says Camilla Dell, Black Brick Managing Partner.
Underneath the bonnet, price trends have reflected the behavioural impact of the pandemic – more working from home and the need to secure more outside space. As a result, houses have outperformed flats in price terms, while price growth in outer London postcodes has far outstripped traditional Prime Central London. Domestic buyers led the way post lockdown and continue to be the dominant force, particularly in the £5m-£10m bracket.
Q1 2021: expect the unexpected
With good news on vaccine progress and an end in sight to tough lockdown conditions later in 2021, will we see a reversal of these trends? Or has Covid wrought persistent behavioural changes to the way we live and work?
Black Brick’s Camilla Dell and Caspar Harvard-Walls expect a bumpy outlook in Q1, with the expiry of the SDLT zero rating up to £500,000, the introduction of a 2% foreign buyers’ surcharge, speculation over changes to Capital Gains Tax in the Spring Budget and adjustment to life outside the EU.
Next year’s price trends are difficult to predict, with the only consensus in the market being that Prime Central London prices will grow over the next 5 year by around 17-18%. Black Brick sees Prime Central London golden postcodes continuing to offer the best buying opportunities while Covid-19 persists and travel restrictions remain in place. New build in secondary areas is likely to continue to be challenged.
Notes Camilla Dell, “Some reversal of the houses vs flats trend is to be expected in the wake of a vaccine and hoped-for return to ‘normality’ after Easter. At Black Brick, we have long argued that demand for central London properties would recover from the Covid shock and that central London living would retain its appeal. Meanwhile, the ‘new normal’ with some continuation of working from home trends should preserve demand for London suburban family houses.”
On Capital Gains Tax speculation, Camilla’s view is that, should it happen, “we wouldn’t expect it to be a massive revenue generator as it will simply encourage owners of properties to hold onto them until retirement, when their incomes will be lower.” Similarly, any extension of the SDLT holiday might be beneficial to the national market as a whole, but it is merely a ‘nice to have’ when it comes to the buying decision in Prime Central London.
With the return of foreign buyers likely to coincide with the new SDLT 2% surcharge for overseas purchases, we would not expect a significant downward impact on the market, although new developments specifically aimed at foreign buyers will likely see the tax absorbed into pricing – for example, Canary Wharf and Battersea Power Station.
Themes for 2021 – a greener year, in more ways than one
Turning to longer-term trends, we see four themes for 2021 and beyond: the ‘greening’ of the real estate sector; the 15-minute city; the ongoing search for outside space; and currency volatility.
The ‘greening’ of the real estate sector
Beyond Covid, climate change is already perceived as the next global threat to health and economies, with an increased willingness to spend money on preparation and mitigation already evident. With Biden in the White House and European countries already making ambitious plans in this direction, greening the economy is being rolled up in the need to ‘build back better’ following the pandemic.
The real estate sector has a huge role to play in this, with the construction and operation of buildings responsible for 40% of global carbon emissions. This should lead to a focus on sustainable buildings and reducing carbon footprints for the industry. JLL have pledged to achieve net zero carbon emissions by 2030 – they are the first agency to sign up to the World Green Building Council Net Zero Carbon Building Commitment. They also recently created a global head of sustainability services and ESG. We expect other agents to follow.
Buyers will become more sensitive to whether a building is “green” – building materials, carbon footprint, energy efficiency rating (a factor which is already important for landlords). Developers will need to look at how they can incorporate this growing trend into their schemes and ‘super-prime’ developments are likely to be marketed on this basis. “Being green will overtake being swanky,” according to Camilla Dell, Black Brick Managing Partner.
The 15-minute city
The likely continuation of working from home and the shift to online shopping points to the need for a more unique high street experience, close to home rather than the office. This dovetails with the rising trend of the ’15-minute city’ which Black Brick expects to rise to further prominence in 2021 – and will help London to become greener, too.
On 15-minute cities, Mark Sutcliffe of smarttransport.org writes : ‘Instead of sucking workers, shoppers and students into congested city centres, the 15-minute approach devolves the provision of day-to-day needs to a neighbourhood, so nobody needs to travel more than 15 minutes to earn a living, buy food, see a doctor and educate their children.”
Under lockdown, huge swatches of Central London streets have become more pedestrianised, such as Regent Street. And buyers are already seeking out leafier suburbs with character high streets. High streets outside Central London will be an important driver of the post-lockdown economic recovery, too, with 41% of all London businesses located on high streets and their immediate surrounds, and 28% of all jobs in the capital.
St John’s Wood is an obvious example of a 15-minute city within London, providing one reason why house prices have risen so drastically this year. White City is moving in this direction, with the new Television Centre development, while Richmond, Dulwich, Hampstead and Chiswick are all good examples, too.
Communal Gardens and Garden Communities
The behavioural legacies of Covid are not just going to encourage buyers to look for houses with outside space, but also properties with access to those hidden gems of Prime Central London – the communal garden square. Camilla Dell of Black Brick notes: “We’ve talked a lot about how buyers have wanted to buy houses with gardens. Another real winner from Covid has to be houses that back onto communal gardens. They offer so much and are less crowded and busy than local parks. Communal gardens offer the perfect combination of private outside space, community and low upkeep. I think these streets are somewhat bullet proof and will always hold value regardless of wider economic events.” Good examples include Lansdowne Road and Ladbroke Square in Notting Hill, Eaton Square in Belgravia, and Onslow Square in South Kensington.
The greenback: a reversal of fortunes?
Brexit has had a profound impact on the sterling exchange rate since 2016 but that may come to an end as the UK fully leaves the EU at the end of 2020. Sterling has already seen some modest upward pressure against the dollar in late 2020 and this may be set to continue.
With Brexit in the rear-view mirror, sterling appreciation against the dollar may become a more important consideration. According to Camilla Dell: “Our clients are not particularly concerned over or talking about Brexit, assuming it is already baked into London property prices. But the trajectory of the currency is relevant – weak sterling has been a nice tailwind for dollar-based buyers since 2016, with the effective discount amounting to as much as 40% at times, and this could reverse somewhat in 2021.”
However, a couple of factors could prevent too sharp a depreciation of the dollar and avoid scaring off those all-important foreign buyers. Although US fiscal expansion and continued QE may put downward pressure on the dollar, international demand for the currency and dollar assets remains strong, not least as the US economy is already enjoying a robust recovery from the Covid pandemic.
On the other side of the trade, the UK is still in fiscal expansion mode and more monetary stimulus is on the cards – including, potentially, a move towards negative interest rates in the UK. The Bank of England has asked the banking sector to prepare for the possible introduction of negative interest rates and has the tool up its sleeve should economic conditions worsen.
These factors – strong global dollar demand, US economic outperformance and market expectations of lower UK interest rates – may help to slow sterling appreciation in 2021, but the direction of travel is still likely to be up.
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Black Brick Property Solutions LLP
15 Bruton Place, Mayfair,
London, W1J 6LU
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Camilla Dell, Managing Partner
+44 (0) 20 3141 9860
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