RFR Special Coronavirus Market Report, Easter 2020.
After five long years of disruption to the prime residential markets precipitated by significant increases to the rate of Stamp Duty and the evolving narrative of Brexit, we wrote to you all at Christmas with the message “All is calm, all is bright”. As we head into the Easter weekend, we are struck by how much has changed since our Yuletide thoughts.
As predicted, and following the outcome of the general election in December 2019, we had started to witness green shoots of recovery at the start of 2020 with Q1 figures showing average price growth (albeit marginal) for the first time since 2015. Buyers had returned to the market in force and, whilst sellers were slower to appear, more stock was becoming available day by day, much of it trading off market to well-advised cash purchasers.
The Coronavirus crisis has brought this renaissance to a very shocking, unexpected and abrupt halt. Whilst we and the rest of the market are working through legacy purchases that started life before the lockdown, we anticipate that new transactions will fall away in the weeks ahead. Perhaps the strongest evidence of this imminent shutdown is the growing number of sales agencies fast making use of the Government’s furlough scheme.
Much is being made of virtual viewings in an attempt to encourage ‘business as usual’ but there are very few high value properties of any quality being overtly marketed in this way. Similarly, some surveyors are offering desktop valuations, but we would voice extreme caution in transacting in lockdown unless you (or at least your advisor) have already viewed the property, agreed terms, concluded a structural building survey, procured finance (and the valuation), obtained searches and agreed a balanced Coronavirus completion clause. Certainly, it appears buyers are prioritising elsewhere with online enquiries falling circa 60% over the last month according to online portal Zoopla.
The current restrictions are incredibly debilitating for the industry but we assume for now that the crisis will be short and sharp, mirroring the trajectory of those in Asia, with the lockdown ending in late May and our markets beginning to re-open in June, albeit tentatively at first. We suspect the typically quiet summer months will see more pronounced activity as travel plans are curtailed and the country focuses on business recovery. In this way, we assume that the recovery will be v-shaped (at least for our market) when it comes, bouncing back with relative resilience by the autumn.
The recent pre-Coronavirus experience is very relevant to this analysis; the market has already seen significant correction over the past five years with transactional volumes in the prime and super prime London market falling circa 40% and average values down by circa 20-25%. In that same period, Sterling has also fallen 20% against the US$ and interest rates have remained at record lows. To this extent, there is less ‘excess fat’ to assimilate in the aftermath of this Coronavirus hiatus and we hope and expect to see the market rebound with some confidence towards the end of the year.
When the doors do re-open this summer, there will no doubt be some imbalances to redress. Demand is likely to exceed supply, at least initially, as sellers take their time to adjust to the new landscape or seek to hold out and take advantage of a more dynamic recovery. For now, there remains very limited distress in the market with homeowners employing low levels of leverage, and most developers having secured long term funding. Where there is distress, there may be more opportunity than usual for focused cash buyers to outmanoeuvre the competition for good quality assets. One such area of pressure could be leveraged portfolios which are reliant on rental incomes to service their debt.
The crisis will undoubtedly impact buyer sentiment in the early months and we suspect any froth created by a shortage of supply to be tempered by a more sensitive and risk-adverse approach by buyers to taking on legal, structural or other issues without adequate compensation. It will reinforce the importance of buying well, precipitating another flight to quality, where best-in-class properties recover and compromised properties with issues to inherit will see greater adjustments.
Some commentators have suggested that the Government may look to reduce stamp duty to aid the recovery to the market but we sense this may be wishful thinking on their part given the likely bill owed by the Treasury at the end of all this.