Larger Homes in Demand
In the early months of 2021, lockdown and social distancing were deterrents for owners considering a sale while weak pricing dampened any enthusiasm for selling – but the real culprit has been the question of fire safety regulation. Despite government attempts to offer some relief to homeowners, fire safety requirements continue to blight the sale of many apartments especially those built in the last 3 decades. At the same time demand across central London had been affected by the global shutdown of international business and leisure travel due to the pandemic.
As we repeatedly point out in this report, our markets rarely have forced sellers. Most owners are not reliant on high levels of mortgage debt and in any event, borrowing rates remain historically low.
Even for landlord investors, many of whom finally ran out of patience with low returns in 2021, the prospect of selling at 2014 prices is deeply unappealing and, in our experience, most decide to hold on. In any event, all properties waiting for resolution on fire safety remedial works will fail to satisfy lending criteria. On the other hand, the new rules of capital gains tax will have limited impact after such a prolonged period of weak price growth.
The price of a one bed apartment taken as an average across all our markets, rose very slightly to £465,000 by mid 2021, an uplift of £5,000 since the beginning of the year. While that is only growth of just over 1%, it is significant because it is the first time prices have risen since 2016. The average price remains at 2013 levels.
One bed apartments have lost popularity since the mass shift to working from home during the pandemic. There have been more significant price rises for larger properties where demand has been focused.
For several years, three bed homes had been losing value in our markets but that situation reversed so that, in the first half of 2021, the price of a 3 bed increased by 3% in the City and 6% in East London. Midtown experienced rises in the later months of last year and here, prices stabilised this year. Still the cost of an apartment of any size in our markets remains significantly down over 5 years.
Affordability remains a major issue for the vast majority of Londoners and the stamp duty burden is heavy for high priced homes. However, with house prices rising sharply in so many other parts of the county, Central London is an interesting proposition for investors focused on long term capital growth and a more realistic proposition for a larger pool of owner occupiers, even first time buyers, especially if they consider one bed properties. One of the key economic outcomes of the pandemic is that high paid workers have accumulated capital while their opportunities to spend have been so severely curtailed.
There is a view that the pied a terre will have a resurgence in popularity once London’s office workers return to their desks, at least for those who relocated their home base further afield over the past year.
The Bank of England reported that private savings were up by £150 billion in 2020 underlining the fact that there have been winners and losers from this pandemic and the winners will emerge with cash to spend. We expect the more affluent members of Generation Rent to become the next generation of home owners and many have been racing to beat the stamp duty deadline on June 30th.
Timing is always critical in housing markets if the priority is capital growth. Over the long term, total returns still looks attractive, with revenue from rents as well as capital growth and prices across all our markets have more than doubled in two decades. There are many global citizens who want to own a stake in one of the world’s leading cities.
That said, overseas investors have been notably absent from London during the pandemic as travel restrictions prevented potential buyers from visiting developments in person. The exception has been Hong Kong buyers who have continued to be active, albeit from remote video tours.
Since April 1st, overseas investors have also faced a 2% stamp duty surcharge on top of the 3% existing surcharge for second home owners and buy to let investors. For an overseas investor buyer, there is a rate of stamp duty tax of 17% for the top tier. Progressive and punitive increases in stamp duty since December 2014 have been the primary cause of stagnation or decline in central London prices.
London’s new homes market typically has a high proportion of pre-sales, agreeing deals long before completion and often before construction has even begun. Over the past year, access to overseas buyers was hit hard by enforced restrictions on global movement and this inevitably resulted in cancelled or deferred sales launches and exhibitions. In Q1 2021, there were fewer new homes sales than in any quarter since 2012, according to research from Molior with construction starts also at historically low numbers.
The pandemic has focused buyer attention on properties with more space, indoors and out. Over 99% of new build sales in central London would normally be apartments, but in 2020, the proportion of houses as opposed to apartments sold in prime central and prime London was at its highest since the turn of the century. Apartment sales in prime central London were 22% lower than the five-year average according to data from Land Registry.
Developers at new homes sites across central London from Covent Garden, Kings Cross, Shoreditch, Whitechapel and Canary Wharf remain confident that they will secure their prices with demand increasing as more people return to the capital in the second half of 2021. It is our view, stated elsewhere in this report, that one of the legacies of the pandemic will be a resurgence of interest in owning or renting a pied-a-terre, to complement the family home remote from London.
Where demand has been weaker and construction activity high, institutional Build-to-Rent investors have stepped in to bulk buy apartments, particularly along the South Bank, from Nine Elms and Battersea to Southwark where large scale development has been encouraged.
After a gruelling four-year process, the new London Plan was formally adopted in March, setting the tone for the direction of the capital through the years ahead. The City is now reviewing its exemption from Permitted Development Rights – a status it fought for a few years ago. Today, the City is open-minded about loss of some of its office space to residential and is keen to continue its strategy of developing a mixed use environment. If its vision is realised, it would allow 1500 new homes to replace vacant office space by 2030.
Despite the challenges, the opportunities to build new homes are extremely limited across much of our market area and developers are generally confident of achieving their target prices once people return to the capital in the autumn.
The demand for living and working in close proximity can manifest in working from home in leafy suburbs, or living in the heart of the city with all the amenity that represents. Canary Wharf Group have recently announced an intention to switch their plans for a one million sq ft office building to a 60 storey apartment block. With Wood Wharf already completed, Canary Wharf is evolving into a mixed-use community.
It is hard to judge the impact of the additional 2% stamp duty tax on overseas buyers, which came into effect in April 2021. We suspect that the pent up demand from prospective buyers who have been unable to travel, will override the additional tax once the market is released. In any event, overseas buyers take into account a large number of variables including currency risk and relative transaction costs in the UK. Most commentators are of the view that London will remain a safe and attractive investment to the overseas market once travel resumes.