Looking back over the past year, it is safe to say that 2020 was a testing time. The UK residential property market experienced the highest levels of uncertainty in over a decade, as the spread of COVID-19 led to a pandemic on an unprecedented scale, and the Brexit deadline loomed.
Cities shut shop, and the home returned as a keystone in our daily lives. Individuals reassessed their living requirements, fuelling new trends in the process which subsequently influenced market dynamics. The UK government adapted fiscal policy, and despite the choppy conditions presented, the housing market remained buoyant.
The initial feeling of uncertainty within the housing market was enhanced as there is often a historic lag between macro-economic shifts and the subsequent impact to the UK property market, meaning that the full impact remained unknown.
However, not all was doom and gloom, as a surge of pent-up demand and fiscal support rebounded residential sales. Movement restrictions imposed because of COVID-19 acted as a motive for individuals to redefine their living requirements, placing a higher importance on a healthy work/life balance, exacerbating and strengthening market trends.
Trends favoured larger living spaces with access to outdoor areas. Zoopla’s July 2020 report highlighted that 3-bed houses were the most in-demand type of residential unit, with 4-bed houses selling faster than the average flat[i].
Fiscal support provided the required catalyst to convert prospects into buyers within the owner-occupier market, as the temporary Stamp Duty Land Tax (“SDLT”) holiday helped maintain and increase transaction levels. Furthermore, the furlough scheme supported the labour market, the cost of borrowing was kept low and the supply of credit continued, further supporting the housing market.
Despite a second lockdown taking place in November 2020, momentum did not slow down as the property industry remained open. Knight Frank highlighted that although the average number of accepted offers dipped during the start of the new lockdown, it rebounded quickly[ii].
Figure 1. Acceptance rate for housing. Source: Knight Frank December 2020.
Residential property transactions in December 2020 amounted to 129,400 transactions, 31.5% higher than December 2019[iii]. The surge in activity fuelled by pent-up demand led to the highest number of mortgage approvals in 13 years.
Figure 2. Mortgage approvals. Source: Bank of England 2020.
Although 2020 finished strong, it is important to note that transaction volume still fell by 11% on an annual basis in 2020 when compared to the previous year. This could well be due to the significant reduction in activity during the first lockdown, as in April 2020, transactions fell by 57% year-on-year[iv].
Transaction forecast for 2021
The strong level of activity is expected to continue in the short term throughout the new lockdown up until the SDLT holiday concludes at the end of March 2021. Coupled with the revision of the Help-to-Buy Scheme in April 2021, meaning only first-time buyers will be eligible for high LTV government-backed loans, a surge of activity is expected as buyers look to beat deadlines.
Should the SDLT holiday conclude by the end of March, Savills expect a potential lull in activity to occur during mid-2021[v]. Coupled with the potential scale back of fiscal support with the expected conclusion of the furlough scheme, this could well become apparent. However, there is growing pressure to extend the SDLT holiday and furlough scheme to mirror the extent of the new lockdown.
Overall, COVID has certainly reshaped the UK housing market in the short term as buyers have favoured larger units with home working space and access to outdoor areas. The extent to which this remains in the future will largely revolve around the role the office will play, and whether the work from home trend will continue.
The release of enhanced pent-up demand fuelled by fiscal policy led to the highest annual house price growth since 2015[vi], as total price growth for 2020 was 7.6%[vii]. Growth was, however, disproportionate across the UK. According to the Government’s latest House Price Index Summary published in November 2020, London, and Yorkshire and The Humber had the strongest average annual house price increase, with an annual increase of 9.7%. Scotland (8.6%), North West England (8.5%), South West England (8.5%) and North East England (8.3%) followed closely behind[viii].
Figure 3. House price change over 5 years. Source: ONS November 2020.
House price forecast for 2021
Price growth is expected to continue throughout Q1 2021[ix] as buyers rush to beat the March SDLT relief deadline. Thereafter, Knight Frank believe that price growth will begin to slow and will be relatively flat, as seen below. [Please note, the following definitions within the graph below: Prime Central London (“PCL”), Prime Outer London (“POL”)]. A slowdown in house price growth is largely expected to arise as a result of rising unemployment, lost GDP, and a decrease in the housing affordability[x].
Forecasted house price growth over 5 years. Source: Knight Frank January 2021.
The lettings market had a varied quarter with the second national lockdown in November along with the tightening of restrictions as we ended the year. Compared to the first lockdown however, estate agents were allowed to remain open which kept the market ticking over.
According to the Office of National Statistics, the average rental growth for the UK as a whole was up 1.4% to the year ending November 2020. The highest growth being in the South West at 2.3% which points to the trend of people relocating to areas out of the major commuter zones.
The greatest impact has arguably been felt in London where 2020 saw rents drop 11.9% in Prime Central London and 9.8% in Prime Outer London[xii]. This has been caused by several different demand and supply changes in the market such as:
- Short term lets (E.g. Airbnb) switching to longer term tenancy contracts thus pushing up supply
- Londoners leaving inner London in pursuit of more space as there is no longer a requirement for a commute with work from home orders being the phrase of the year.
- International students not returning for the start of the academic year in September/October.
Looking forward, the broader economic backdrop will influence how the UK rental market performs. Future national lockdowns and unemployment will be the two biggest influencers. The Job Retention Scheme (furlough) being extended until March 2021 has kept voids and unpaid rents relatively tempered. However, once the Scheme ends and the real unemployment figures filter through, there could be a short to medium term impact on households’ ability to pay their rent.
Having said this, households have entered this economic crisis in a slightly better position than the Global Financial Crisis of 2008. According to CBRE, average UK household debt in Q1 20 was 123% of household income versus 144% in 2008[xiii]. CBRE expect a modest 0.9% rental growth throughout the UK in 2021 with a rise to 2% each year until 2024[xiv].
5. Residential value and rent forecasts 2020-24. Source: CBRE December 2020.
BUILD TO RENT/PRIVATE RENTED SECTOR
2020 saw the Build to Rent (BTR) sector have a record year of investment according to CBRE with £3.6B invested. Q4 20 alone saw over twice as much investment compared to Q4 19, at £955M.
Figure 6. Multifamily investment volumes, UK. Source: CBRE December 2021.
Even though 2020 was very rocky year in terms of investment, the figures show that the BTR sector is still proving attractive to those investors in search of a yield during a crisis. Knight Frank report that the average rent collection for BTR assets was 95.1% in November 2020 with the monthly collection since March 2020 averaging 95.8%[xv].
Looking forward, Knight Frank believe that the BTR will solidify its position in the market over traditional buy to let with further investment due to the changing tenant priorities because of COVID-19. The purpose built, affordable product with added features such as: onsite support, all-inclusive rent packages and parcel collection are becoming rental “must haves” as we progress into the new normal way of life.
Investment volume was largely subdued towards the beginning of 2020 due to the movement and social restrictions imposed, creating a barrier to the traditional approach to investment. In addition, operators were facing disruption and were left in a difficult position as many chose not to charge rent from the students who left their accommodation as a result of the pandemic and enforcement of remote learning.
Despite the market shock experienced, PBSA remains an attractive asset class and investors remain active within the market.
Rent and occupancy levels
Most operators either offered rent reductions or waivers throughout 2020, resulting in a significant decrease in rental income across the year. Occupancy levels also fell for most operators. However, certain halls of residence maintained higher occupancy levels by increasing the incentives on offer.
Whilst the year has been extremely challenging for multiple stakeholders, occupancy could improve as students could look to elongate their studies or stay in their accommodation during holiday periods to make up for lost time[xvi].
Demand for UK universities should also remain strong due to the inverse relationship between unemployment and university places. Highlighting this, the number of placed undergraduates increased 4% year on year for the 2020/21 cycle[xvii]. Universities are also planning to return to on-campus teaching as soon as possible, which should increase the occupancy levels in the near future.
Certain operators have also begun to offer flexible, single term leases which should provide an element of confidence to students who may avoid living in purpose built student accommodation for fears of future lockdowns.
Over the past few years, investment into UK based PBSA has significantly increased. However, activity within the sector was unable to escape the ramifications of the pandemic and activity towards the beginning of the year dropped.
Activity picked up thereafter. In June 2020, Unite raised £300m in equity to fund three new PBSA developments, in July, Kinetic Capital established a PBSA funding platform for £100m, and Blackstone acquired IQ Student accommodation for £4.66bn. These are a few examples of how the student accommodation market remains increasingly attractive, despite the short-term impacts COVID has had on the industry.
Despite facing the deepest recession in living memory, the residential property market remained resilient, though the short-term impacts of COVID varied across the different sub-sectors. Although market trends have shifted in the short term, the length to which they continue, and the subsequent long-lasting implications will largely be driven by a combination of macro-economic conditions and a changing workplace environment.
The future role of the office and the extent to which a work from home lifestyle continues will strongly influence the shape of the housing market in the future. A rise in unemployment and slow withdrawal of fiscal support will also determine the affordability of housing, in terms of both capital and rental values.
In addition, the disruption caused by COVID has caused many to rethink the relationships between owner and occupier, as the highlighted importance placed on resilient cashflow by supply side stakeholders has led to improved flexibility and potential better service for tenants.