Coutts London Prime Property Index | Q1 2020

After lockdown measures were announced by the UK government at the end of March, most estate agents closed their high street offices, face-to-face viewings stopped and the government urged people not to move house as part of the measures.

While this has put the prime property market on hold, the elements that led to a rebound haven’t gone away:

• Renewed political certainty after the general election
• Limited supply creating competition among buyers
• Weaker sterling, combined with the additional stamp duty for overseas buyers coming next year, creating short-term incentive for non-sterling buyers
• Historically low interest rates – which have fallen further and are likely to be lower for longer

These factors are unrelated to the current crisis and likely to come back in to play when the world goes back to normal.

In the immediate term, however, there are a number of issues that could end up having a more enduring affect.

 

Valuations have ceased

Physical valuations – where lenders visit a property to confirm the lendable value – more or less ceased at the end of March, as most valuers were instructed to pause their visits.

While desk-top valuations are now becoming common for lower value properties, prime property lenders are still considering the best way to support applications already in the pipeline. This will delay outstanding transactions, and potentially lead to deals falling through.

 

Lenders reconsidering their offerings

Given the economic impact of efforts to contain the outbreak, lenders are re-assessing the levels of risk they are willing to take on. As a result, a number of them have reduced their maximum loan-to-value (LTV) ratio – effectively reducing the amount they are willing to lend.

The Bank of England’s reduction in the base rate has put margins under pressure in some products. Many lenders have pulled short-term, base rate-tracker mortgages or increased rates to continue providing these products to clients in the current rate environment.

Coutts remains dedicated to supporting clients throughout this period. Homebuying proposition manager Alex Lyneel says, “Coutts has been supporting clients for over 300 years, helping them through difficult times when needed. Despite the current circumstances, we’re continuing to offer high levels of service for our clients.”

 

Transaction volumes falling

When the market starts moving again, pre-existing deals will either continue as normal, fall through or be renegotiated.

In the short term, we expect prime property transactions to be delayed, notably in prime London where listing times could extend beyond the average 172 days seen this quarter.

 

Prime prices likely to hold

The lower end of the market may be subject to falls due to employment levels and market sentiment, but prime markets tend to be more durable and likely to hold up if the lockdown is lifted in the summer.

Unlike the global financial crisis of 2008, this is not a credit crisis. Borrowers are not structurally over-extended and measures on affordability introduced since that crisis will have done their job to provide a buffer.

Therefore, we don’t expect a rash of forced sales that would drive prices down. However, we may see more deals under offer renegotiated as a result of uncertainty in current market conditions, which could introduce some negative pressure on prices.

 

Rebound likely to continue as outbreak recedes

The factors that revived the London prime property market at the end of 2019 remain in place through the crisis, albeit in abeyance. In particular, a lot of pent-up demand was released after the UK general election in December that has not yet been fully satisfied.

Rob Cohen, managing director at valuation firm MJ Group, says “Our data suggests that before the coronavirus outbreak, the top end of the market was underpriced, compared to previous historic highs, the market was in rebound and sentiment was good. If the lockdown exit strategy is managed effectively, with transactions getting back to more normal volumes during the summer, there’s a chance that the market could pick up from where it is now.”

The pound also remains at historically low levels, making London a very attractive market for non-sterling investors. The government’s announcement that it would impose an additional 2% stamp duty for non-residents in April 2021 is also generating interest from overseas buyers keen to transact before the deadline arrives.

With interest rates even lower than before the crisis, and likely to remain low, the income stream from property looks even more attractive. Financing will remain cheap, and we may also see the number of products and LTVs available expand. Longer term, this could see the London residential market’s status as a safe haven for money maintained and potentially enhanced.

There are still many unknowns, of course, around how the outbreak will play out. We could see changes in work and living patterns that have unforeseen long-term impacts on residential property.

Coutts UK chief investment officer Alan Higgins recently considered the possible consequences for commercial and residential property investment in a longer piece, Coronavirus: The broader impact – Property.

In the meantime, we’ll continue to monitor the data on prime property to see how the market reacts.