Will COVID-19 affect prime central London real estate?

Alpa Bhakta

April 23, 2020

Alpa Bhakta is the CEO of Butterfield Mortgages

In the aftermath of the 2016 EU referendum, there was a notable decrease in the number of prime central London (PCL) property transactions taking place.

This was due to the lack of certainty regarding the impact Brexit could have on market demand for PCL, particularly given the fact that international investors are involved in half of those sales.

The UK’s 2019 General Election result changed all this. With the election of a majority government in December last year, investors rallied to UK-based assets including bricks and mortar. As a result, PCL property prices rose by 0.2% in Q1 2020―an impressive performance in light of the previous year’s figures.

With Q2 2020 now in full swing, the property market is now coming to terms with the full implications of the COVID-19 pandemic.

However, there are signs to suggest that the coronavirus, and the ensuing UK lockdown, might not have a drastic, long-term impact on PCL prices.

Here’s why there’s good reason for optimism.

Investment from abroad

Non-UK based investors interested in adding to their property portfolios with PCL housing may not be as inactive as one might think during lockdown.

In fact, for vacant properties, there’s little to stop such buyers from completing on their transactions if the seller is still eager―and if not, the final step can be delayed until restrictions are lifted.

The government is clear in its guidelines on this matter, opening up the possibility for such investors to take advantage of current conditions.

This opportunity becomes more attractive by the comparative discount available when using foreign currency. For wealthy individuals whose liquid assets are comprised primarily in US Dollars, current exchange rates present a discount―relative to 2014 prices―in the order of 40%.

With 55% of all PCL property transactions in February 2020 being made exclusively by non UK-based residents, it is likely the prime market will remain an attractive destination for international investors in the months and years to come.

This is partly the reason why the government is planning to introduce a 2% Stamp Duty Land Tax surcharge in April 2021 on international buyers of UK property.

But how will prices in the PCL market be affected in the short-term?

Still ready to grow

A short-term decrease in general UK property prices is unavoidable. With transactions now placed on hold―as per the government’s guidelines―property prices will likely drop to reflect the extremely limited number of potential buyers.

The immediate impact of this short-term decrease depends on whom you ask, with Savills predicting a general decline of anywhere between 5-10% and a more optimistic Knight Frank forecasting a 3% decrease.

The shared belief found in both of these forecasts, however, is that the long-term impact of COVID-19 will be limited. Knight Frank actually predicts PCL prices to remain unchanged throughout 2020, followed by an 8% increase by the end of 2021.

Savills continues to place their full confidence in their five-year UK forecast of general property price appreciation of 15% by 2024, a prediction made even before anyone had heard of COVID-19.

Their reasoning follows the same theme as that I’ve already discussed; namely the strong market performance at the beginning of 2020 has not simply disappeared as a consequence of COVID-19; rather, it is positioned to return once restrictions are lifted and things return to normality.

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