How the UK commercial property market could create a downward effect on the residential market
Updated: Nov 26, 2020
Residential Market Update
Strong Demand, Static Supply
In the six weeks following the re-opening of the property market in England, buyer demand has been “relatively strong”. Zoopla is seeing demand at around 46% above the levels of early March for property investment. Hamptons (Top 15 Estate Agent by volume in the UK) has reported a 26% increase in agreed sales in June 2020 compared to June 2019. While these are positive signs for sure, given that the property market was shut for a full 3 months, demand/sales in June would really need to be more like 2 times of March level or 2019 June level to signal a life back to exactly like before.
I think what these signs do mean, is that in the short-term, the surge in demand is outgrowing the supply. This creates upward pressure on prices (the average asking price for homes marked as sold on Zoopla in the first 2 weeks of June are 7% higher than a year ago). This short-term surge is likely to delay house price falls to much later in the year or even next year.
With regards to why the surge in demand but not in supply? Many of us have spent months sitting at home, many have had the change to re-evaluate their needs and lifestyle. Those unaffected by the economic situation is in a place to move house. Surprisingly, this is the decision some have taken even if unemployment is a realistic fear. With mortgage rates still at historic lows and rents higher than mortgages, those that have saved a deposit would want to move sooner rather than later. Especially if they are worried they may become unemployed in the second half of the year and then would not qualify for a mortgage for a while. However, during the same period, supply has not increased. The economic downturn has not yet reached a place that means repossessions, and most investors are not in a “forced sale” position yet. Some have even pulled their sales off the market and choosing to still rent out for now.
While agents report the flow of new supply has returned to pre COVID levels, Zoopla reports that overall stock levels are still lower due to no new supply coming to the market over the lockdown period.
Slashed Stamp Duty May Increase Short-term Supply
Effective from July 8th, the government has put in measures until next March 31, increasing the stamp duty payable threshold from £125,000 to £500,000. Effectively slashing the stamp duty payable on all residential property transactions, investors, and second homes all included. This will have the largest effects in more expensive areas as the savings for purchasing a property at £500,000 or higher is now £15,000 lower.
It’s hard to say whether it will be the buyers who pocket these savings or sellers, but it should support more transactions, may bring more supply in the short term. It may also mean that sellers are less likely to accept deeper discounted offers from buyers.
However post the scheme ending on March 31st, there could be more dried up supply and power would change hands to be more on the buyers’ side.
Commercial Market Update
Tenants Struggling to Keep Up Rent
It’s no secret that many businesses in the hospitality industry are suffering. Although restaurants can finally open from July 4th, social distancing rules and table arrangement rules mean that even when full with customers, they can only operate at around ⅓ to ½ capability as before. Although there will also be some variable cost savings, however, fixed costs like rent, utilities, and key staff costs would remain. With the average restaurant making a thin 5 to 10% profit margin even in good times it’s hard to imagine how they can survive the current situation for long. I would assume many would need to keep the reduced VAT margin (20% reduced to 5%) to survive rather than passing those savings to consumers.
All that is assuming they can fill the newly reduced capacity. An ONS survey recently found that only 2 out of 10 people are comfortable with eating out in restaurants. The newly introduced “eat out to help out” scheme by the government may help out in more affordable cities, a capped discount of £10 per person won’t convince many to dine out in London.
According to data collected by Remit Consulting, retail tenants had paid just 42% of their rent, and leisure industry businesses like cinemas and gyms paid only 25%.
More Supply from Planning Reform
The government is also introducing a radical overhaul of the planning system, while details still to be announced in September. The prime minister has communicated that there will be extensions to permitted development rights. Making a wider range of commercial buildings to be allowed to change to residential use without the need for a planning application.
Increasing Number of Commercial to Resi Conversions Will Drive-up Supply
With both factors above combined, could mean even more commercial to residential conversions would happen, at a faster phase than previously, which in term would increase the supply of available residential properties. However, it’s unlikely to happen in the short term.
Short term hospitality industry bleaker than elsewhere in the UK
Great Portland Estate, a major central London landlord, report to have collected only 28% of rents from their retail, restaurants, and leisure tenants in June. As these businesses re-open, it’d be optimistic to assume everything goes back to normal. High-end restaurants usually get a fair share of customers from business lunches and dinners, many of whom are not yet back in the office. Many have given their employee the greenlight to remain working from home for the rest of 2020.
Job Cuts at Big Banks
During the first quarter of this year, headcount across the 12 biggest investment banks has dropped by 5%, according to Coalition a specialist research and analytics firm focusing on the Financial Services Industry. This is the steepest decline for that period in the last six years. The majority of the cut has been led by European lenders, in line with plans put forward unrelated to COVID. Coalition predicts by the end of this year, the continent’s banks could have 20% fewer employees than at the start of 2019.
Decreasing Office Space Needs
The job cuts are often part of bigger programs to restructure and cost-cutting to improve profits. Now executives at big banks are also considering whether they need a large corporate office. Recently the COO of UBS Group AG has already mentioned that as many as one-third of its employees could work remotely permanently, as reported by Bloomberg.
Our view is that in the short term horizon of the next 1 to 3 months, residential prices are likely to hold up. Any weakness in sales may only come through starting December when unemployment flows through and stamp duty benefits start to lose its lustre on buyers.
Director | Kinden Property
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Sources and Further Reading:
 UK House Price Index May 2020 Edition - Zoopla Jun 24
 Savills UK | English Planning Reforms – Build, Build, Build - Savills Jul 01
 Banks Are Ditching London Offices and Not Just Because of Covid-19 - Bloomberg Jul 06