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June 7, 2021
8 mins

Will London’s luster last after lockdown?

June 7, 2021
8 mins
Citi Private Bank
Luxury residential properties along Grosvenor
SUMMARY

The demand for London's finest properties held up well in 2020, despite the unprecedented challenges of COVID. But the pandemic is likely to leave its mark on the top end of the capital's residential market, even as the UK's third lockdown eases.


Despite a global recession and unprecedented restrictions upon everyday life, the top end of the London residential property market has remained remarkably resilient over the past year. While prices have dipped during the pandemic, demand has held firm, with the number of new buyer registrations up by the most in a decade.

Estate agents have reported that affluent overseas buyers are still actively seeking fine London homes. That is despite often having to view properties virtually because of travel restrictions. But is it possible that London might have lost some of its luster for wealthy individuals and families from around the world? An increase in purchase taxes for non-residents and greater appetite for outdoor space are two reasons why it might have.

Ollie Marshall, director at London-based property agency Brooks Marshall, sees things rather more positively. He says that after six years of decline, London’s high-end real estate market is set to rebound once travel resumes.

“There is huge pent-up demand from domestic and international buyers,” he points out. “International buyers had been reluctant to invest in London because of Brexit uncertainties and the possibility of a socialist-led government in 2019. However, with those risks now behind us, there is no reason to hold back.”

 
There is huge pent-up demand from domestic and international buyers.
 
Ollie Marshall
Director of Brooks Marshall

The first lockdown had a significant impact on the prime central London market. Prices fell 2.1% in April last year, according to data from Knight Frank, an estate agency and property consultancy. This was followed by a 1.4% drop in May, taking the annual decline to 5.1%. After the easing of restrictions, there was a surge in sales. Since then, however, prices have largely remained flat. Due to travel restrictions, many overseas buyers have been unable to travel to the UK.

Overseas buyers are likely to return

For the super-prime London market – defined as properties worth upwards of £10 million – UK residents accounted for a third of all activity in 2020, up from 12% a year earlier, according to Knight Frank.

European buyers, and particularly those from France, were also in evidence, given the relative ease with which they could reach the city.

Viewings for super-prime properties fell by 36% in the year to January 2021 compared to the previous 12 months due to travel restrictions, the steepest decline in a decade.

However, overseas demand rose by 109% over the same period. Knight Frank says this is the strongest such rise in more than a decade, which underlines how pent-up property demand from overseas buyers is building, thanks in part to the success of the country’s vaccine rollout.

Despite a dip in the middle of last year, sales of luxury property went up, highlighting the resilience of the market. The total number of £10 million-plus deals in London in 2020 was 93 compared to 99 in 2019.

Total spend was £1.62 billion in 2020, down 12% from the previous year.

The pandemic has forced many affluent residents of London to reassess their urban lifestyles, with space now higher on their list of priorities.

Demand for outdoor areas means that houses have become more popular. Activity has focused on areas such as Notting Hill, Belgravia and Hampstead, which are close to large parks.

Many buyers are also looking for sizeable properties outside of the capital that are closer to open spaces, with a notable interest among wealthier purchasers in English country estates.

For all the concerns that London might lose its appeal after pandemic owing to businesses closing and more people working from home, it is unlikely that we will see a mass exodus, says Tom Bill, Head of UK Residential Research at Knight Frank.

“In the first six months of the pandemic we noticed a big drive to rural areas but now people are looking for properties with more space, balconies or roof terraces in London,” he says. “COVID has reshaped demand in the prime property market and when international buyers return, I am not quite sure if it will be ‘business as usual,’ as tastes may have changed.”

What will happen post-pandemic?

London’s appeal as a destination for affluent international buyers of homes or investment properties is long established. The city benefits from a reputation as a “safe haven,” given the UK’s respect for property rights. Despite increased taxes on non-resident buyers, there are no legal restrictions on owning a property, as in some other countries.

Professional and lifestyle factors are still primary considerations. The city boasts excellent schools, restaurants, and cultural life, and ranks as Europe’s top financial sector and legal hub. With the vaccine rollout and the lifting of restrictions, some experts are now predicting upwards pressure on prices.

Financial conditions may prove influential in the near term, according to Mr Marshall of Brooks Marshall. “With all the monetary easing we’ve seen, clients are talking to us more than ever about wanting to acquire real assets around the world. London residential property is an obvious asset class in this regard. And the pre-COVID weakness in pricing creates greater upside potential, in our view.”

The London prime central market could thus rebound strongly once international travel resumes. Knight Frank is predicting price growth of 2% for this year and 7% in 2022. However, there are fears that more expensive properties could suffer from the new requirement for non-UK residents to pay an additional 2% in stamp duty on their purchases. As a result of this increase, foreign buyers face an 11.3% upfront levy on a London home worth £1.5 million.

However, Mr Bill thinks it unlikely the new tax will deter international investors. “London is still very much in demand and the market will remain strong irrespective of the higher stamp duty, with most international buyers factoring it in to price negotiations,” he says. “London still compares well with other countries, with low entry costs around tax and property. “All the evidence suggests people have missed London and will want to come back as soon as they can.”

Sterling matters

Mr Bill adds that if the British pound continues to strengthen against the US dollar, this may accelerate some pre-existing plans overseas buyers have. And he also warns that the supply of super-prime new-build property could shrink over the next several years. “After the value of the pound fell after the referendum, there has been an obvious opportunity for dollar-denominated buyers. As the UK economy comes out of the pandemic, that window will close,” he says.

“New-build has already done well during the travel ban,” says Mr Marshall. “It’s a lower-risk way in when you’re buying a property unseen. As a result of the demand, a lot of the previous overhang in supply is getting cleared. And because development activity had also slowed due to Brexit uncertainty, we can envisage a squeeze in new-build supply going forward.”

 
New-build has already done well during the travel ban.
 
Ollie Marshall
Director of Brooks Marshall

Some would-be buyers may be laying the ground for once borders reopen. “We are seeing evidence of hedging and buying sterling from international clients who want to buy but who can’t travel for now,” says Mr Marshall. “They clearly want to take advantage of pricing here and don’t want to lose out if sterling strengthens further. All in all, this gives us a good indication of the amount of capital that could be about to enter the market.”

The successful vaccine rollout should encourage international buyers who have been unable to view properties in the past year. Demand for high-end luxury property is likely to remain strong from Asia, the Middle East and the US.

In recent years, there has been increased demand for London property from Hong Kong buyers given local constitutional changes. The new UK visa scheme introduced in January gives millions of Hong Kong residents the right to seek to settle in the UK, which could also lead to an uptick in demand for high-end homes.

Ollie Marshall says London is unlikely to lose its draw as one of the world’s top cities for the world’s wealthy after the pandemic is defeated. “Once the travel restrictions are removed, there will be a surge in prices, driven by prime central London,” he says. “When any bear market snaps back, the initial relief rally tends to be quite punchy, so I would be not be surprised to see prices go up anywhere from 10% to 20%.

“If you want the best possible value, you need to buy before those travel corridors unlock because when they do, you are going to be far from the only buyer in town.”

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