Through the COVID-19 crisis, the UK property market has so far grabbed headlines for positive reasons. Seemingly unscathed during the onset of the crisis, the market was performing strongly in the face of the coronavirus pandemic. Notably, pricing remained stable, despite adverse conditions. As the months passed, the tide turned a little: retail and hotel properties began to struggle due to the knock-on effects of lockdown measures and reduced footfall. But, overall, the market has held up well – an anomaly amid trending financial distress in other sectors.
Yet one question remains: “How might the UK property market fare in the event of a second wave?”. While we cannot predict the future – and the COVID crisis has exceeded all of our expectations both in its social and economic effects – we at BACB strongly believe in the resilience of this asset class. Despite the challenges that have emerged in what has been an unprecedented year so far, we remain confident that the property market will continue to offer sustainable growth opportunities. And here’s why.
As the pandemic wreaks havoc globally, it’s easy to forget that Brexit was once the primary source of market anxiety. Pundits had expected a steady capital withdrawal from the UK following the referendum, with drastic consequences in the real estate market. Yet this didn’t materialise. Halifax’s house price index indicated that the real decline in the month following the vote was no more than 1%. And the sector, overall, regained losses in reasonably short time: the Hometrack Cities House Price Index demonstrated that only one in 20 UK cities had sustained a drop in average house prices in the two years following the 2016 referendum.
While the Brexit decision did have some effects – mainly in cultivating a bearish outlook which, in turn, caused a softening at the top end of the market – these were short-lived. The UK property continued to attract multinational investors, with London real estate, in particular, continued to stand out for its range and diversity, making it a target for global corporates. The residential market experienced some stress but on nothing on the expected scale, and the commercial property market has performed well in recent years.
The pandemic has, of course, presented new complications and expectations of a crash in property prices were high yet again. But we have evidence that proves the opposite, particularly in the early days of the outbreak. Residential property prices, for instance, actually increased when compared to 2019 levels. Indeed, as investors sought stable options to hold value amid tumbling markets, real estate’s status as a traditionally safe asset became almost self-sustaining, attracting eager new investors wishing to diversify.
That’s not to say that real estate will be exempt from behavioural changes brought about by the “new normal”. The large-scale shift to remote working will likely mean that the office market will have to become much more flexible and agile.
That said, we do not anticipate that demand for office space will diminish entirely. Lockdown might have taught us that most office work can be successfully done from home, but the reality is that most businesses still rely on personal connections and social interaction. The demand for office space could conceivably increase as businesses are obliged to accommodate social distancing measures – if office space that held 100 employees can now accommodate no more than 50, the business may have to rent another floor to obtain additional capacity. Of course, the reverse may also be true – and companies which have downsized or moved some staff to permanent remote working may choose to lease less space, and those owning buildings may look to let out parts of their offices.
The leisure and hospitality sectors face a somewhat more uncertain future. Hotels, in particular, have been severely affected – most closed quickly after lockdowns were imposed and reopening may still be some way off, given travel restrictions and strict social distancing measures remain in place.
But commercial real estate’s reputation and track record as a safe investment will likely be enough to see it through the current crisis, and business owners have proven themselves capable of finding innovative ways of keeping their businesses afloat. At BACB, we’ve supported customers struggling with the consequences of the pandemic by way of interest deferrals, as well as more tailored financial assistance, in line with PRA and FCA guidance. Whilst uncertainty remains – both around Brexit and the duration of the COVID-19 disruption – we remain confident that the real estate sector will once again prove its resilience in the face of adversity.
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