Time To Rebuild: How Covid-19 Hit London’s Development Market
At the beginning of 2020 the mood in London’s development market was bullish. Demand was healthy and the uncertainty of the general election was behind us. The only potential hitch on the horizon was Brexit. And yet, just three months later, our departure from the EU seemed almost irrelevant.
As the Covid-19 pandemic spread, the UK’s famed service industries withdrew behind closed doors. Retailers retreated online and workforces wallowed at home. The construction industry, however, had no such luxury. You can’t build buildings on Zoom.
Lockdown came at a bad time. Build costs were already high thanks to regulation changes and labour shortages. Essential projects were allowed to continue but restrictions on workers made it hard – very hard. Consequently, it looked like an industry famed for its ups and downs was going bear the brunt again.
A crisis of confidence
The growing crisis soon scuppered the government’s plan to deliver 300,000 new homes every year. In April, construction activity fell to its lowest level since the 2009 financial crash: the seasonally adjusted HIS Markit / CIPS Construction Total Activity Index dropped to just 39.3.
Meanwhile, Savills predicted that just 171,000 new homes would be built during 2020 – a drop of 34% on the previous year. The government tried to help by expanding permitted development rights in July but confidence predictably remained low.
The property market itself ground to a halt too. With unemployment on the rise, and furlough providing only temporary relief, few buyers seemed willing to invest top dollar in London’s celebrated postcodes. This had a knock-on effect for developers because the number of new projects is linked to the sale of existing homes.
A glimmer of hope
Fortunately, the summer brought slightly better news. Whether it was due to pent up demand or the government’s stamp duty holiday, property sales rose unexpectedly during the summer months. What is normally a quiet period for estate agents therefore became rather busy – especially in the suburbs and shires.
Sadly, however, central London didn’t enjoy quite the same boost. Lockdown made buyers crave more spacious properties with ample outside space. However, this didn’t stop London’s developers from adapting creatively to the new normal.
Instead of prioritising a sense of community (with generous communal areas), some developers reacted to Covid-19 by offering enhanced remote working facilities. Euroterra’s Queen’s Gardens Residences near Hyde Park, for example, included bookable office space with 24 hour access, strategically positioned Internet routers, and vestibules designed for contactless deliveries.
It remains to be seen, however, whether this trend ensures. Although remote working has been on the rise for some time, many workers will be keen to get back to their (regular) office when the pandemic ends. Furthermore, buyers’ desire to sidestep communal areas will surely fade as Coid-19 itself wanes.
Consequently, we believe that traditional factors such as planning policy, land availability, and maximising returns by repeating designs that have worked well in the past will shape future developments more than the virus.
To the future …
It’s hard to know precisely where the market sits right now. The land market is volatile at the best of times so uncertainty over construction costs, rents, yields, finance and planning makes it even harder to predict what’s coming next.
Sadly however, it seems inevitable that the number of homes built over the next five years will be curtailed by Covid-19. It’s hard to predict the exact number but Savills estimates it could be between 125,000 to 318,000. Having said that, they also predict the market could return to 2019 levels as early as 2023 if construction capacity increases and confidence returns.
Much will depend, of course, on the emergence of a viable vaccine. We also hope that government grants for affordable housing will be generous. But whatever happens, at least we know that the current situation is not as bad as 2009. The market has bounced back from worse before.
London will always be in vogue
The other good news is that London remains one of the most desirable cities on earth. There’s rarely a shortage of investors eager to pump capital into the nation’s capital. Furthermore, investing in no brainer locations always reduces risk in uncertain times. And nowhere has more locations like this than London.
Finally, the green shoots of recovery are already visible. Just this summer Art Invest Real Estate completed a £140 million acquisition of a 4.5 acre site at Canada Water – by far the largest commercial land deal since the pandemic began. With every sale, and every construction contract signed, confidence will gradually return. And with a fair wind it won’t be long until the new normal starts to look remarkably like the old one.