June 2021

Turning up the volume on the PCL market

Buoyant national housing market datapoints have continued to stream in this month, with regional price gains far outpacing those in London. Rightmove reported aggregate London asking prices up by only 0.2% year-on-year in May, compared with gains of 13% in Wales and 11% in the North West. But the outlook is increasingly bright for Prime Central London, with many postcodes having missed out on price appreciation over the last twelve months. Indeed, the window of opportunity may be closing for those wanting to time the bottom of the market.

This month’s newsletter delves into what the next property cycle might look like, following a ‘quiet decade’; highlights further signs of a resurgence in the PCL flats market; explores the industry-wide behavioural changes that are likely to remain with us as memories of the pandemic fade; and, looking through the hype, wonders whether crypto can change the way the residential property market operates.


What will follow the ‘Quiet Decade’?

Current market strength is inevitably prompting speculation over how long such gains can continue and what sort of housing market ‘cycle’ awaits in the aftermath of the Covid pandemic.

The phased end of the stamp duty holiday between July and September, coinciding with the end of the furlough scheme, has prompted concerns in some quarters. Cluttons’ latest market outlook highlighted the balance of risks going into the end of the year: “With the late announcement of the extension and the introduction of a taper, any ‘cliff edge’ effect on transactions in either June or September should be reduced, but some level of drop-off is inevitable. From Q4 there is considerable uncertainty, as the return to previous tax levels coincides with the scheduled end of furlough and the expectation that unemployment will rise substantially from its current, artificially low, level. On the positive side, a majority of the population should be fully vaccinated and much of the economy will be operating close to normally. So, assuming the economic recovery is underway, the key question is simply whether the high levels of demand seen over the past year are sustainable.”

The widely-followed RICS survey suggests a lack of supply is helping to underpin the national market: “A lack of fresh listings was the biggest concern cited by respondents – with many saying it was not nearly enough to match the interest shown by potential buyers…Unsurprisingly therefore, house price growth rose again in April – with a net balance of +75% noting an increase in prices at the headline UK level.”

A further interesting, and long-term, addition to the debate about the shape of this cycle came from the Bank of England this month, in the form of a speech made by MPC member Sir John Cunliffe, entitled: ‘Housing-The Quiet Decade’. In it, Sir John argues that the last ten years of UK housing market activity may not provide a good indication as to the next ten, given the unusual market headwinds created by the recovery from the global financial crisis. In the UK, over the 12 months to February, house prices have risen by 9.1%, the highest growth rate since October 2014. This compares to an average annual growth rate of under 4% in the 10 years prior to the pandemic. …The pre-pandemic decade, however, may not be the right comparator. The 10 years following the financial crisis appear unusual in that over that period house prices grew broadly in line with incomes, having grown at double the rate of income in the previous twenty to thirty years.”

Sir John also suggested: there may also be some reasons to believe that the recent increase in demand for housing, and perhaps the composition of that demand, which has driven the UK market in recent months reflects some more persistent drivers and that the market will not fall back to its pre-pandemic decade performance when the tax incentives have gone. A survey conducted by Nationwide in April found that, amongst homeowners moving or considering a move as a result of the pandemic, three-quarters of them said they would still be moving or considering moving even if the stamp duty holiday hadn’t been extended. Moreover, the stamp duty holiday in Scotland has already come to an end with no material drop-off in demand.”

As is often the case, Prime Central London is not necessarily following the trends of the wider UK market, with some traditionally in-demand areas having fallen out of favour during the pandemic, and capital values in general having peaked in 2014. April 2021 does seem to have marked the trough for both PCL capital values and rents and the question now is how quickly, and how strongly, prices will rebound in the coming months, not least as foreign travel restrictions are gradually eased.


The Expectations Gap

With talk of ‘fear of missing out’ and a ‘feeding frenzy’ characterising regional markets outside London, Prime Central London continues to dance to its own tune, with the best of the market recovery still lying ahead. Indeed, the confluence of a restricted supply of properties to the market, subdued rents and a rising domestic housing market are creating dilemmas for many currently looking to purchase.

Black Brick Partner Caspar Harvard-Walls has observed the dilemma the market recovery is starting to create for buyers: “Some of our clients are currently in rented houses or flats where rents are 15% lower than they were in early 2020 and are finding themselves questioning whether they should really take the plunge and buy. Against a backdrop of rising prices during the pandemic, these buyers understandably do not want to shift to a less favourable property and wonder whether waiting could improve the situation. While renters might be hoping that the quality gap will start to converge over time, it is actually more likely to diverge as capital values continue their recovery. These buyers risk getting caught in a waiting cycle. In this market, staying put may not be the right financial answer long-term.”

Looking ahead, Caspar judges there will be one more quarter before the market takes off for a deferred Autumn selling season: “The PCL market has proven resilient even without the return of foreign buyers. When it comes back, the first few percentage points of capital appreciation are likely to materialise quickly. The best window we have had into what a PCL recovery looks like was January and February 2020, when Brexit and the general election were out of the way but the pandemic was yet to take hold. If this proves to be an accurate insight into the future, there is a risk that cautious buyers get caught out in the Autumn.”

As Camilla Dell, Black Brick Managing Partner notes: “Overseas buyers are not yet rushing back for the summer. The summer months would also usually see an influx of buyers from the Middle East, but with many of those countries still on the UK’s red list, the usual flood of buyers from this region will be delayed. Depending on how the next few months goes, there may be more interest from overseas buyers coming to the UK and self-isolating.” In fact, there may be new sources of foreign demand supporting the market in the coming years. As the Telegraph’s Rachel Mortimer recently reported, Hong Kong buyers are becoming a more significant presence in the London market: “The proportion of London homes bought by Hong Kongers has quadrupled since a new visa scheme allowing residents of the island to relocate to Britain was announced last July. Property firm Benham and Reeves said Hong Kong buyers now accounted for 4pc of London transactions among its clients, up from 1pc. The rise intensified since the British National Overseas visa opened for applications in January. The new policy could see 300,000 Hong Kong residents move to Britain in the next five years following increasing interference in the region from mainland China.”


Diving back into the pied a terre market?

Last month, we mused about the potential renewed ‘pull of the pied a terre’ in Central London as workers gradually return to the office and perhaps settle into a ‘Tuesday to Thursday’ in-person working week. The latest data from Rightmove certainly seems to confirm a surge in buyer interest in PCL flats.

As reported by Reuters: “Demand is returning fast in Britain for apartments and other city-centre property, which buyers had avoided during the coronavirus pandemic in favour of big houses in rural locations, a survey showed on Thursday. Online property portal Rightmove said flats are now the most in-demand property type for the first time in at least 10 years, with buyer interest up 39% since January – based on the number of times people contacted estate agents about properties. Demand for city-centre housing in general has risen by 35%, compared with a 32% rise in demand for housing in villages. … Rightmove said buyer demand for flats in April stood 51% above pre-pandemic levels in February 2020.”

The City of London Corporation certainly seems to believe in a central London property revival, announcing plans this month to turn empty offices into 1,500 new residential units by 2030.


What we hold onto, and what we leave behind

As we approach the UK’s so-called ‘freedom day’ on June 21st, when the remaining social distancing restrictions will hopefully be lifted, this prompts an opportunity to reflect on how the property industry has changed as a result of Covid, and what measures brought in to cope with the crisis actually help to improve the real estate industry and the way we do business.

From our perspective, the pandemic has only reinforced the merits of using a buying agent in the Prime Central London market. With each postcode its own microcosm, expert knowledge is key when targeting hard-to-find properties in competitive markets such as family houses with gardens. Similarly, Black Brick was able to find buyers for out of favour properties such as flats without outside space during the pandemic through our managed sale offering.

The shift to a greater proportion of off-market sales during the pandemic as sellers wished to avoid unnecessary viewings on the open market is likely to remain a market trend. Again, Black Brick’s wide network of estate agent contacts can help our clients to access properties before they are openly marketed, while carrying out thorough due diligence and applying detailed local market knowledge to ensure clients pay the right price.

The pandemic is likely to have raised the quality of viewings in general – long gone are the days of Saturdays spent viewing properties for entertainment as buyers shift their attentions online, helped by more detailed advertisements, 3D virtual viewings and property videos. Sellers will only have to open their doors to the most serious of buyers. The shift to digital is also helping to speed up the conveyancing process, with more widespread use of digital platforms such as DocuSign and online mortgage application processes now increasingly adopted by lenders.

Looking ahead, the intensity and disruptive nature of the pandemic on our everyday lives seems to have focussed policymakers’ minds on taking seriously another foreseeable risk to modern economies – climate change. Camilla Dell has long argued that “green will become the next issue in a post pandemic world” and this is a theme which we will be following closely as it evolves.

Efforts to ‘green’ the economy and the financial system will certainly have an impact on the residential real estate market. Already, mortgage lenders are starting to offer more favourable borrowing terms to those buying greener properties. Conversely, as reported in the Telegraph, the Government has recently outlined “plans to require mortgage lenders to attain higher EPC ratings across the average of their portfolio from 2025. Homes that do not reach higher ratings could face more expensive mortgages, or losing value on their property.”


PropTech & Crypto: a fad or the future?

How far might the digitalisation of the UK property market stretch? The extraordinary price gains and tumbles experienced in the crypto market over the last 18 months have been dominating the headlines and, reportedly, even very high-profile property entrepreneurs such as Nick Candy have been willing to accept bitcoin as payment – in this case, for a flat in the One Hyde Park development.

Black Brick Managing Partner Camilla Dell is sceptical that crypto as payment for prime London property will take off as a trend: “Crypto currencies are so volatile it seems unlikely that many sellers would want to swap stable, safe-haven and highly desirable London properties for something as risky as bitcoin. Moreover, property buyers and sellers are rightly required to do thorough due diligence to comply with Know Your Customer and Anti-Money Laundering regulations. Transactions denominated in money held outside the banking system, such as bitcoin, would make these checks much more difficult to carry out.”

While we are sceptical that crypto assets will become a payment method for property, this is not to say the technology underpinning them – distributed ledge technology (DLT), or blockchain – will not impact on the property market. There have been many failed attempts to digitalise property transactions in the past and the ‘human element’ is hugely important in any property transaction – for example, deciding whether to renegotiate prices in response to a change in buyer or seller circumstances, or a shift in the market. But DLT could facilitate improved property records, more secure and speedier transactions, the greening of the market by providing more transparency, or even the tokenisation and ‘fractionalization’ of properties (where a buyer can purchase a fraction of the asset instead of the whole thing).

As noted by Sergey Golubev in a September 2020 article on Medium, intriguingly: “Any property, whether commercial or residential, can now become ‘live’ with the ability to collect data that can be used in many ways, not least to measure and track every aspect of any asset and its tradable value…These and many other factors will transform into valuations, and how real estate will be used, via tokenization. As real estate tokenization achieves scale, decentralized structured finance and structured products coordinated in smart contracts will become prevalent.”


Acquisition of the Month 1: Lennox Gardens, SW1 – £3,050,000

Our U.S. clients were looking for a London pied-a-terre as they have family here and were keen to take advantage of the favourable exchange rate. Through an extensive process of searching and ultimately pre-viewing more than 50 properties on their behalf, we unearthed this classic and elegant second floor apartment on Lennox Gardens, a prime address, for our client.

The flat benefits from high ceilings, open green views both front and rear, with access to communal gardens, and the further benefit of a Share of Freehold (rare for the area). The property was sourced entirely off-market and we managed to negotiate £200,000 from the asking price, which included the furniture and white goods.

Through our extensive connections we are able to access off market opportunities that our clients would not ordinarily be able find on their own. Similar properties have come to market recently which have attracted multiple bids and higher prices. Our clients were able to avoid this scenario. We are effective negotiators and were able to secure a competitive discount, including furniture and white goods.


Acquisition of the month 2: York Way, King’s Cross, N7 – £760,000

We were instructed to assist in the purchase of a two-bedroom flat in a secure new development close to Kings Cross. Our client was a first-time buyer from Croatia who was studying for her PHD at UCL so she was very busy and needed our help. Without an in-depth knowledge of the market, the areas to consider, or the process, our assistance was required to explore, educate and advise.

We identified a stunning two-bedroom apartment set within a modern development located a short walk away from both Kings Cross station and UCL. Being owner-occupied, the apartment was still in almost new condition. There was a competing bid on the table from another buyer, but thanks to our swift negotiations we managed to not only convince the owner to sell to our client, we also managed to negotiate £15,000 off the asking price, equating to a very competitive £938 per square foot.

By ensuring our buyer’s offer was well organised and clear from the outset, the vendor knew that with good representation, the buyers would be able to move to a swift exchange and completion. This helped him to tie in his onward purchase before the end of the Stamp Duty holiday, allowing us to secure the property ahead of a competing bid.


Managed Sale of the Month: Queens Road, Richmond, TW1O – £1,350,000

Black Brick are delighted to bring to market this month a stunning two-bedroom flat in Richmond, priced at £1,350,000. This truly unique apartment spans the entirety of the first floor of a beautiful high-ceilinged Victorian building. The property offers unrivalled entertainment space and two en suite bathrooms, spanning a total of 1420 square feet. The property further benefits from having access to large communal gardens, off-street parking for two cars and easy access to Richmond Park.

To arrange a viewing please contact Hamish Bruce, Head of Managed Sales: Hamish.Bruce@black-brick.com Mobile: +44 (0) 7842 310 064.

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