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Should PCL property investors be worried by COVID-19?

Alpa Bhakta Butterfield Mortgages

Alpa Bhakta, chief executive of Butterfield Mortgages Limited

Those who have been keeping a keen eye on the prime central London (PCL) property market over the last five years would have noticed significant spikes and troughs in demand. However, nothing could have prepared investors for the unprecedented economic impact of COVID-19.

Just as market uncertainty surrounding Brexit began to dissipate, projections and forecasts are now having to be re-adjusted to account for the unavoidable decline in transactions throughout the first half of 2020 as a result of COVID-19 lockdown measures.

But how will PCL real estate be affected in the long-term? The answer is more hopeful than many may assume, as the contributing factors that positioned 2020 as a year for market recovery have not simply disappeared because of COVID-19. In this article, I’ll discuss some of these factors and provide an overview of what we can expect from PCL real estate in the coming months.

A sector primed for recovery

As mentioned above, UK property prices had been stagnating for years due to investors’ concerns regarding Brexit. While by no means a done deal, Boris Johnson’s election victory and commitment to make progress on Brexit was positively received by the market.

The initial uptick in investor confidence, or “Boris Bounce” as it has been hailed by some, was the impetus for the market finally showing sustained year-on-year growth since June 2016. Both Nationwide and Halifax recorded a 3% annual increase in UK property prices since March 2019. House sales also jumped by 6.8% following the general election last December―indicating the extent of buyer demand.

Such a recovery cannot continue when there are no properties to buy, and this now seems to be the case following the government’s advice to delay property transactions indefinitely unless absolutely necessary. But PCL has always acted differently than the UK housing market as a whole, so a resulting decline in prices may not be as sure as one would expect.

This is not to say that PCL homeowners can expect further increases in the value of their property during the lockdown. However, I am confident that market demand will result in a surge of transactional activity once the COVID-19 pandemic is resolved.

How is the PCL market reacting?

One of the organisations that has had to revise its property price forecasts in light of COVID-19 is the global property consultancy Knight Frank. It now believes that market inactivity as a result of the pandemic will lead to a short-term decrease in property values of 3%. This is a more optimistic outlook than Savills, who has placed the decline as anywhere between 5-10%. Importantly, however, both groups have indicated that PCL property is set for a new level of growth once COVID-19 is contained.

Their reasoning echoes what I’ve already stated above. Q1 2020 facilitated a 0.2% increase in PCL prices―the highest Q1 increase since 2015. Given the finite nature of any pandemic, there is strong reason to believe that things will quickly return to normal.

That is why Knight Frank believes that over the general course of 2020, PCL prices will neither rise nor fall by the end of the year. By 2021, however, it claims the revival of activity will fuel a predicted 8% increase in PCL prices.

The COVID-19 pandemic is not like any other health crisis we’ve encountered in recent memory here in the UK. While it is having an impact on the markets, it should not be compared to economic downturns like the global financial crisis. Yes, there are immediate obstacles to overcome but we should not let these distract from the long-term growth projections for PCL, and indeed, the wider real estate market.