While financial markets have been making the headlines for the level of activity – a record level in many instances, as well as the sharp drop in values – the coronavirus pandemic is also having a significant effect on property markets. Our focus is on the UK property market, and particularly the residential sector.
Beyond the headlines, the economic implications of the coronavirus pandemic on all things property related are changing on a frequent basis as governments and central banks respond to their countries’ latest news headlines – or, in the EU, the future state of the Eurozone.
We believe the pandemic will create a number of waves in the UK property scene in a number of ways:
- The lockdown means that people are unable to view houses, undertake property valuations, move forward on mortgage or conveyancing processes, or complete existing transactions
- As stock markets have fallen, wealth levels have been eroded. Clients may also be facing decisions as to how to cope as pension drawdowns and the payment of company dividends are deferred, with no timeline set for things to ‘return to normal’
- At the same time, rental income holiday periods are likely to become prevalent, with no hope of evicting those who don’t or won’t pay
- The economic shutdown will impact employment earnings and levels, while there is less of an opportunity to generate additional income through businesses and consultancy work
- The recent weakness in sterling may prove a positive for overseas buyers. While the economic impact from coronavirus is not comparable to that of the global financial crisis, it’s still worth noting that prime central London, by way of an example, experienced an uptick in its aftermath
The UK government is looking to be seen as offering swift support that is aimed at injecting cash directly into the economy. It also encouraged lenders to ‘adapt and be flexible’ in the government update in late March.
Ultimately, whatever the shape of the recovery, we believe the scenario of a long and slow recovery (akin to that following the global financial crisis) should be less likely. In the meantime, how can property investors remain focused?
Key to the recovery is the length of this lockdown. Until we see any light at the end of that tunnel, we believe transaction levels will drop to near zero levels for at least the next 12 weeks, and potentially longer if we look at markets like Hong Kong, where restrictions have been reintroduced following a spate of new cases.
As we noted in our investment updates, testing remains key to allow governments to assess if enough of the population has some form of immunity, and if the healthcare system has the capacity to deal with cases effectively, before we can predict a timeline for people to start to leave their (current) homes. A vaccine will take a lot longer to be tested, approved, manufactured and rolled-out.
China – the only economy to seem to be coming ‘out the other side’ of this – saw near zero property transactions for the first three weeks following movement restrictions, and while they have recovered to 50% of the four-year average, this doesn’t necessarily provide any sort of a guide for the UK. The nature of the Chinese property market is not comparable, not least as there is an overwhelming preference for real estate over any other investments.
However, given that this scenario is fundamentally different from previous market turmoil, we believe demand will build up and be released in late Q3 or Q4, depending on how and when the current restrictions are lifted, although this could tip into next year.
Our conversations with a number of related parties suggest that house prices may dip slightly (e.g. -5% to -10%), but only on a very low number of house sales, and probably focusing on sellers who have had their hand forced, through ‘gazundering’ for instance (i.e. lowering the offer just before the exchange of contracts). Meanwhile, for those who had started transactions, while these will be delayed, there is little to prove that there will be a fundamental shift in prices that prompt people to pull out. Once we are allowed to move more freely, we are likely to see these transactions being completed relatively quickly. This is especially because any disadvantages prompting the desire for a change in scenery, before the pandemic hit, will have been reinforced week in week out during the forced confinement. Going forward, the challenge is likely to remain the lack of available stock, which, if this continues, will dampen activity and maintain price levels.
We also believe that we will see a quick uptick in activity among the wealthier households, or those where employment income has not been hit, and who will want to take advantage of the Bank of England’s lowest ever interest rate level. Meanwhile, the recent lows in the value of sterling may also provide a way for overseas buyers to sidestep the cost of the additional 2% in stamp duty delivered in the 11 March 2020 Budget. These buyers may take the lead in any post-pandemic purchases.
The restriction of movement has stopped people viewing and moving property. It will also put a stop on landlords being able to evict non-paying tenants for at least the next three months. In addition, the chancellor of the exchequer announced that mortgage lenders should work with landlords, as well as other homeowners, to allow for payments to be deferred in the event of cash flow problems. In turn, landlords would then be able to defer payments from those tenants who have been financially hardest hit by the current crisis. However, it has been made clear that any late repayments or mortgage holidays should be agreed in advance by all parties. Given these measures, we expect to see a significant drop in rents from tenants, and while these will be repaid over time, going forward the lower economic activity will likely result in slower growth in rental yields over the next year. However, the continued shortage of supply in the rental market space should provide some support for the sector.
It is our view that the bulk of any UK property lending in 2020 is likely to remain to be re-mortgages, where Nedbank Private Wealth can continue to help those clients who have found high street banks to be unwilling to look at their personal financial situation in its entirety.
Our balance sheet remains strong and, as in the past, we can continue to lend even if economic activity remains challenging. We have rapidly adapted our working model and procedures in light of the lockdown, and continue to support homebuyers and re-mortgagors, wherever possible.
In addition, we have also had a number of discussions around the opportunities for investment-backed lending. This is where we can help clients release capital for a number of reasons, such as covering short-term costs or making tax-efficient gifts, without being forced to sell their investments.
While the current conversation will focus on the length of the lockdown and what any ‘exit strategy’ might look like, there are also questions being raised as to how much this will fundamentally change our approach to life. Businesses around the country have enabled millions of employees to work from home, and some employees will want to be able to continue to do so, if only for part of the week. However, we can see businesses actively promoting this – why would a business want to pay for office space that could be paid for by the employee? It’s too soon to speculate, but a shift in how people work would have long-term consequences for cities, commuting and conurbations, and may well change the way we work as fundamentally as the introduction of the railway did in the Victorian era.
On Sunday night, the Queen’s message to the nation stated that future gatherings of friends and family will happen, but that for now we need to pursue life with quiet, good-humoured resolve. So until the better times return, the conversations can continue in that pragmatic spirit and, while we may not be physically visiting clients, or meeting our network of property professionals during the lockdown, we are very happy to have a call – either over the phone or via a video link – and help you understand how Nedbank Private Wealth can assist you during the current market uncertainty.
Clients can call their private bankers or relationship managers on the usual direct lines, or get in touch via our client services team on +44 (0)1624 645000.
Our flexible lending facilities can be arranged in sterling, euro or US dollars, although any property used as security must be UK, Isle of Man or Channel Island-based. To find out more about Nedbank Private Wealth’s bespoke lending services, please contact us on the same number as before between 8 a.m. and 8 p.m. UK time during the working week, or email us.
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Colin joined Nedbank Private Wealth in 2010 after 15 years with Barclays, working within its retail, commercial and wealth management divisions. He acts as a trusted adviser to a select group of high net worth clients, which include private individuals, professional intermediaries, companies and trusts, providing clients with a tailored and holistic private banking, wealth planning, investment management and fiduciary services. He is a Chartered Wealth Manager and a Chartered Member of the Chartered Institute for Securities & Investment.