2020 was certainly an interesting year. We had the pandemic, national lockdowns, restrictions on property viewings, low interest rates, a stamp duty holiday and the end of Brexit. A year to remember, but for many of the wrong reasons. So, against this background, we would like to explain how this has impacted the property market in London for both the home buying and rental sectors. Here you’ll find a brief summary of the presentation our very own Regional Director, Vatche Cherchian, made in a recent webinar in conjunction with the National Landlords Association.
To watch the complete video, click the link above.
House prices rising in London and the UK
We’ll start with some good news for current homeowners or landlords. House transaction prices have risen in the capital and across the UK and they’re averaging £496,000 in London.
As the graph shows, London prices, indicated by the blue line, were largely flat in 2019, while average prices in the UK (pink line) outperformed London with growth of 3-4 percent. So it’s interesting to see this year’s increase, although progress hasn’t been smooth. The first national lockdown saw a sharp fall in buyer and seller sentiment. But, since then confidence has risen and so has demand.
In fact, demand has risen faster than we anticipated. As Vatche explains, “That’s purely down to the Chancellor’s announcement of a Stamp Duty holiday earlier in the year. Anyone buying a property up to £500,000 immediately had an extra £15,000 in Stamp Duty savings which they could spend on property purchase.”
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Transaction volumes down, but no risk of a crash
Although prices have risen, we have found that transaction volumes are down by about 10 percent compared to the same time last year. Considering this year’s unique set of circumstances, we feel that’s not a bad result and, in fact, we think that volumes could pick up in the first quarter of this year for a number of reasons.
For a start, sales stock is up by around 7 percent and there has also been a big increase in demand fuelled by the Stamp Duty holiday. That could have translated into higher transaction levels this year, but bottlenecks in lending and conveyancing meant those sales have taken longer to reach completion.
Property transactions actually increased by 27 percent between July and September, but average transaction times lengthened from 12 to 20 weeks. That’s why we think transaction volumes will increase as buyers push to complete before the Stamp Duty holiday ends on 31st March.
In Vatche’s view, “We expect the benefits of the Stamp Duty holiday to translate into a bit of a bulge in increased transaction volumes, certainly for the first quarter of 2021.”
Overall, there’s reason for optimism about transaction levels. Current volumes are around 10 percent higher than the levels that led to the crash in 2008/9. Circumstances then were different — the banks stopped lending. What we’re seeing now is a gradual slowing of volumes with far less impact on prices, and funds are available. On that basis, we think that a similar crash is unlikely.
Variations across London offer attractive investment opportunities
We’ve spoken about general trends in prices and transaction volumes in London, but, if we look more deeply at individual boroughs, we find there can be significant differences across London. And that can help to uncover attractive investment opportunities for landlords.
If we take just two examples – Westminster in central London and Haringey further east, we see distinct patterns. Volumes are down by around 40 percent in Westminster and 50 percent in Haringey. That’s no real surprise, given the difficulty of arranging viewings during the first lockdown and the later bottleneck in completions.
But, here’s the difference. Prime central London prices have remained relatively flat recently. We would have expected prices to start dropping after a period of volume decline, but that hasn’t happened in Westminster. We believe that’s because the market was ‘frozen’ for the three month lockdown period.
Now, look at Haringey – a bigger volume drop than Westminster - yet average prices are up by 5 percent!
Given the variations, Vatche insists, “It’s really important to look at which of the boroughs are the most attractive when we’re looking at where to invest.”
Uncertainty drove rental prices down, but recovery looks likely
Over the last few years, rental prices had been steadily rising. Tenants were staying longer in their properties and there were fewer new landlords deterred by the changes in taxation and mortgage relief.
That resulted in lower rental stocks and inflationary pressures that fuelled rental price increases of 5.3 percent in 2018 and a further 4.2 percent in 2019.
However, the pandemic has created major economic uncertainty around job security and ability to maintain regular rental payments. As a result, average rental prices fell by around 3 percent. Fast forward to 2021 and landlords have reasons to be optimistic. Although we’re in a serious situation now with a new national lockdown, the vaccination rollout offers prospects of a return to more certain economic conditions. When that happens, tenants will be more willing to move. That will be balanced by a return of rental stock such as short-let stock and holiday lets which were marketed for sale as they struggled to find new tenants. With supply and demand in greater balance, then rental prices should get back on the upward curve.
Vatche comments, “I do believe we should be really positive about the outlook and the recovery of rental prices and rental stock in 2021.”Read More: Where To Buy Property In London In 2021
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Winners and losers across the London rental map
In our review of housing sales, we highlighted the differences in investment opportunities across London — it’s the same for the rental market. When we map average rent changes during 2020, there are distinct variations in price changes between inner and outer London boroughs.
The only areas where average rents remained flat or increased were outer boroughs such as Redbridge, Barking & Dagenham, Bromley and Croydon where rents increased by up to 4 percent from 2019.
It’s a different story in the inner London boroughs where Wandsworth, Lewisham and Newham saw decreases of 4 to 8 percent from last year, while central boroughs like Westminster and Camden fared even worse with drops of up to 12 percent.
Putting those variations in a wide context, Vatche believes there will be a continuing shift to larger properties in outer London, “More people are now working from home and they don’t have to worry about a long commute to central London. They’ll be happy to filter out to some of London’s outer boroughs where they’ll have access to more open spaces. That has been an important need on the shopping list of many tenants and buyers this year.”
This distinct variation in rental prices and rental yields, as we’ll explain, means it’s essential to look at individual areas for the best investment opportunities.
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A small decline in rental yields but capital values up
Recent years have seen increases in yields as rental prices held firm while property values declined. A large number of boroughs achieved 4 percent in 2018 while, in 2019, average yield increased to 4.5 percent with many achieving 5-6 percent.
However, this upward trend did not continue and the average yield for London in 2020 is 4.2 percent – slightly down from last year. We believe this is due to the temporary rental price decline that we described earlier.
But, on the upside, capital values have not been so negatively affected as previous years and have risen over the last 12 months.
Investment bright spots remain
Given the variations across London, we’ve identified a number of boroughs that we believe represent strong investment prospects for 2021.
Top of the list are Barking and Dagenham in the east and Sutton in the south west.
Barking and Dagenham has seen an increase in yields this year giving an average yield of 5.4 percent. Prices have increased by 3 percent since 2019 with an average house price of £315,000.
There is considerable development in the area, which is widely considered to be the cheapest place to buy property in London. Planners have set a goal of 50,000 new homes and 20,000 new jobs to be created in the next 20 years, which represents strong growth prospects.
Barking Riverside is one of the largest development projects in London, with plans for around 10,800 new homes and a new ecology centre and wetlands site.
Sutton has seen an increase in yields this year giving an average yield of 4.4 percent. House prices have increased by 3 percent from last year with the average price £449,000.
Sutton is also seeing considerable development, with around £410 million invested in the area. The borough’s location makes it very attractive. It has a village feel with affordable properties. Surrey is close by, but the area has easy access to the rest of London — Victoria Station is just 30 minutes away.
The year in perspective
2020 has been a unique year for everyone in the property market. We’ve been through an expected dip in transactional volume tempered by an increase in average sale prices boosted by the Stamp Duty holiday. We should see volumes recover in the first part of 2021 and it’s unlikely prices will crash.
Overall, London rents and yields have taken a bit of a hit this year mainly due to the pandemic but we should be optimistic that these will recover in 2021. And, as we’ve found, good investment opportunities are there with some outer London areas outperforming inner London and providing higher rent growth and yields. That's why it’s so important to understand which areas to invest in.
Portico can help
If you would like to discuss investment opportunities in more detail with one of our experts, please contact us on 020 7099 4000. Get an up-to-date online property valuation, or a rental valuation with our online rent calculator.