Looking down at London from a plane’s descent into Heathrow, it feels like the city extends in every direction. Crescents of houses, punctuated by children's parks; grandiose squares and familiar landmarks. The River Thames snaking through the city- once its main transport corridor and still its lifeblood. It is not a city of high rises- the Shard or Gherkin less characteristic than the urban sprawl stretching toward Kent and Essex. Cranes are still evident in Vauxhall and Nine Elms, the City and East London, but more often they are delivering infrastructure, rather than shiny skyscrapers. For years it has been a magnet for workers and entrepreneurs. Partly from British regions but also from the European orbit- Tallinn and Warsaw, Bratislava and Ljubljana. Its attraction beyond the continent resides in association with Britain’s chequered past, and recent identity as the financial hub of Europe.
The arguments and observations as to why the city is changing post Brexit and Covid are well rehearsed. Less obvious is how this will affect the dynamics of the real estate market in London. Recent analysis by the Financial Times considers the movement of foreign born nationals and the stark reality London is falling in population for the first time in nearly three decades. Since the onset of the pandemic, the Economics Statistics Centre of Excellence (ESCoE), estimate nearly 700,000 individuals may have moved on- equating to nearly 8% of the entire population of the city. The reasons for this are unclear- the rise of home working likely a contributory factor, not one offering full explanatory value.
Elsewhere Propeterra has considered rental and capital values in specific districts of the city. But the more pressing point is whether currently observed dynamics are likely to define the short and medium term, or be considered a blip, long forgotten after the roll out of the vaccine. Anecdotal evidence points to some inescapable truths. The city is expensive and many in the lower and middle strata of the income spectrum do not have much disposable income and live precariously. The compensation- by and large- is the ready availability of jobs, hope value for the future, and the extraordinary cosmopolitan character of the city. In the case of a pandemic, the compensations are diminished and the challenges have become more acute. Jobs- especially those in the service sector- have become precarious, or have been converted to furlough. The future feels uncertain and there has been an effective cessation of all restaurant and cultural activities.
The Financial Times points to drops of between 10% and 15% on headline rents in areas like Kensington and Chelsea and the City of London. In the informal market though, it points to a drop as great as 25% to incentivise the movement of tenants into otherwise vacant properties. It also highlights the lack of clarity in data released by the government and Land Registry. In particular, the fact there have been increases in prices in certain areas, but averages blurring property types and regions, with higher value units driving up mean prices of other central parts, which would otherwise be muted.
From an investment perspective, the broader rental market is perhaps more relevant than instances of the wealthy purchasing leafier homes when confronted with home confinement. Rental yields in London have long been at low levels, owing to high capital values. Rather like the cost of living equation, these have seemingly reflected risk. Low likelihood of delinquency or default, due to the popularity of the city. Similarly, anticipated increases in capital values underpinning higher returns by the point of exit. If prices do not fall commensurately to rents, yields are likely to remain static, or even decline, without the upside previously envisaged. Combine this with the potential for more stringent lending criteria in the coming years, and there is a possibility of a correction of the market in certain areas. If less liquid buy-to-let investors look to dispose of properties in the face of declining demand, there could be a glut of properties hitting the market with all the fallout this would involve.
This is not to say London cannot correct this imbalance, but it requires careful consideration by policy makers. To ensure population returns to the capital, employment will be a big determining factor. Many foreign-born workers are employed in the service sector and the headwinds hitting these industries are strong. Combine this with the so-called ‘points based’ immigration system implemented post Brexit, and the FT is right to highlight the need to urgently address this mismatch. Optimists, though, point to London’s longer term fundamentals and its pre-eminence as a financial centre. Some funds are telling Propeterra of their strategic selection of central residential assets, or at least preparedness for acquisition if circumstances move in their favour. The truth is London was in an uncertain world pre-Covid but now forecasts confound even the experts. In reality, it is big enough and diverse enough to offer up opportunities alongside challenges. Risk is particular and investment subjective. All is possible, much unknown.