“The more things change, the more they stay the same” goes the French saying.
This aptly describes the UK’s property market.
It once seemed to have been turned upside-down by the pandemic, and yet in reality, Covid-19 now appears to have only moderately accelerated the pace of existing change in the sector.
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Commercial property markets are bouncing back
The first casualty was the retail sector as shops closed and the move to online shopping massively accelerated. Despite government support, many shops and restaurants shut for good and it looked doubtful that the premises they vacated would find new tenants.
In fact, new tenants have emerged, perhaps at lower rents, and many of the empty spaces on the High Street have been filled. Consumers are discovering the limitations of online shopping and home delivery of meals and seem happy to pay the higher prices necessary to pay for higher wages.
The exceptions are the inflexible, expensive-to-run retailing formats. Mid-market department stores have been under pressure for decades and redevelopment of their sites looks inevitable. Shopping centres are under severe pressure; as Peel Hunt points out, there are too many of them, they are too large and costs – including heating, cleaning and security – are too high.
Retail parks have been outperforming them for four years, thanks to their being “right-sized, affordable, accessible and adaptable.” This makes them simpler to operate and easier to manage while “the open-air nature makes them cheaper to run and more sustainable.”
Office property looked likely to be a secondary casualty as the shift to working-from-home threatened to become permanent. As Charlie Ellingworth of Property Vision says, “a consensus around partial working from home now seems to be pretty universal.”
Hot-desking or desk-sharing might seem to offer the opportunity to save on space and individual offices have become hard to justify, but there is more need for social spaces and meeting rooms.
In the City, the news on new developments, both the announcement of new projects and the letting of completed ones, has been surprisingly positive, but the secondary market has been more difficult.
The vacancy rate in the City is about 8%; above the 5% average for the last ten years but well below the crisis levels of 15% hit in previous slumps. Wisely, the City Corporation set out some years ago to attract non-financial businesses and to increase the retailing, leisure and residential content.
City offices are also likely to benefit from migration from the West End, now relatively expensive, and Canary Wharf, whose location remains problematic and whose large floorspace configuration no longer meets current demand. Also, it compares poorly with Kings Cross, Paddington Basin and Nine Elms on almost all criteria.
In the West End, footfall has steadily increased as office workers return; theatres, restaurants and bars have reopened and shoppers are flocking back. However, it remains 14% below the December 2019 peak, according to Shaftesbury Estates.
The tourists are slowly returning, but VisitBritain expects inbound tourism in 2021 to be 82% below 2019. The increase in domestic tourism helps, but is less of a factor in London than in, say, Cornwall. 2022 should see a big recovery.
What about residential property?
In the residential property market, the move to the country continues though the press is reporting anecdotal evidence of regret from those who miss city life. With prices having rocketed, roads busy, trains unreliable and city life returning to normal this is hardly surprising, but it is beyond doubt that increased working from home has changed the market.
People want more space at home, they are able to live further from their place of work and they want open spaces on their doorstep. They also need “a solid phone signal and full-fat broadband”, says Ellingworth, “but there are still parts of the country where a phone signal, let alone 3G, is intermittent or non-existent.”
Nevertheless, “Yorkshire, Cornwall, Wales and Cheshire are all now in the sights of those whose work is in London, and prices in all those areas, though still short of the Cotswolds and West Sussex, are moving up sharply.”
The London property market has been quieter and, as elsewhere, the pendulum has swung back from flats to houses. The supply of flats is always more elastic than that of houses so the market goes from boom to glut more easily than for more land-intensive houses. In addition, the cladding scandal has cast a dark shadow over blocks of flats, discouraging potential buyers, whether for those with a problem or not, and trapping sellers.
“At the very top end of London,” says Ellingworth, “there have been some spectacular sales and the communal gardens of Holland Park and Notting Hill remain as popular as ever. It is a sellers’ market and new stock is in short supply.
“This is not the case in the massed towers of Nine Elms where a perfect storm of rising building costs, Asian buyers stuck at home and a Chinese government bringing down the shutters on their citizens is producing a glut of monotonous flats – with views only of their neighbours’ laundry and a long walk for a newspaper and a cup of coffee.
“This has been priced, in the past, at a premium to the surrounding area. What few buyers there are are beginning to question why – a question that will become more acute as more new stock piles onto the market.
“The poster boy for this is the Damac Tower – decorated by Versace in what will be the best possible taste – overlooking three lanes of traffic and a dozen railway tracks opposite Vauxhall station. Is this really prime London as the blurb claims? The next couple of years will provide an answer.”
What does this mean for investors? In commercial property, life is returning to pre-pandemic normal. Rents and values will follow occupancy but there is no solution in sight for the structural problems of department stores, shopping centres and office blocks in the wrong location with the wrong floorspace.
In the residential market, house prices seem high but have been driven there by structural trends that are unlikely to reverse. The market for flats in tower blocks will need the overseas buyers to return.
House prices are regularly described as absurdly high and unaffordable but, though supply is steadily increasing, government plans to ease planning restrictions appear to have been scrapped.
It is easily forgotten that, though prices have soared, financing costs have slumped. Mortgage rates hit 15% in the 1970s and 1980s but fixed-rate money is now available for under 2%. The cash cost of mortgages is high but most of this cost consists of loan repayments and hence wealth accretion.
Unless and until interest rates rise markedly, most of both the commercial property and domestic property markets are on solid foundations.
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