02 Banking on the Future Spring/Summer 2021
JULY 2020
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Foreword By Andrew Deverell-Smith
2021 is the year of possibility; organisations and wider society are motivated to look forward, seek growth and create success.
Brexit, Covid-19 and 2020 have had a major impact on real estate and the global economy, but opportunities have risen in the UK following an injection of optimism fuelled by vaccines, government incentives and a Brexit deal. Thursday 25th March 2021 saw the second edition of deverellsmith’s flagship event Banking on the Future take place, partnering with Bank of England. Kate Davies, CEO of Notting Hill Genesis, and Liam Bailey, Global Head of Research at Knight Frank, joined Robert Elder, Senior Representative of Bank of England, to provide insight capturing the convergence of the British economy and both the private and public property sectors.
The virtual event followed the UK budget from Chancellor Rishi Sunak and the Bank of England’s hotly anticipated Monetary Report Publication. The air date was conveniently 1-week before the End of Financial Year providing a unique and highly qualified perspective on the challenges and opportunities of the year ahead. Each speaker provided a standpoint from their specialism: the wealthy, affordable housing and the bank which created an interesting and dynamic discussion taking in consideration every audience involved with the property lifecycle. This report will showcase key findings and extracts from the conversation. Due to Bank of England’s policy, deverellsmith do not have permission to publish the webinar recording or Robert Elder’s comments.
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Banking on the Future 2.0 Robert Elder
Kate Davies
Liam Bailey
Andrew Deverell-Smith
Senior Representitive Bank of England
CEO Notting Hill Genesis
Global Head of Research Knight Frank
CEO deverellsmith
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Opening Statements LIAM BAILEY
A relevant piece of research which Knight Frank has published recently is it’s 2021 edition of the Global Wealth Report. Around a third of all property investment is driven by private capital, not pension funds and not the institutions, but affluent or wealthy individuals around the world. Therefore, an understanding of the behaviours and attitudes of the wealthy is fundamental to understanding global property market trends and risks. We will focus on two areas of the report throughout this discussion:
Global Head of Research Knight Frank
• Wealth Creation - Global policy response to the pandemic supported the wealthy and it’s the same story out of the Global Financial Crisis; lower interest rates, more fiscal stimulus means asset prices have surged and our wealth sizing model confirms that the world’s ultra-high net worth population rose by about 2.4% over the past 12 months. However, this growth in wealth is a risk to wealth creation as nearly half of Knight Frank’s survey respondents expect the growth in wealth inequality, that’s developed through the pandemic and over the last few years, to fuel demand for policies aimed at curving imbalances. • Residential property – House prices are rising and have risen because of the pandemic not despite it. Our assessment of the world’s leading prime residential markets confirms that average price growth has accelerated over the last 12-months with places like Auckland in New Zealand leading the pack with an 18% growth in prices, reflecting perhaps New Zealand’s sure-footed handling of the pandemic. Even those markets that have been hit hard have seen price growth, so low mortgage rates, search for space and privacy, change in commuting patterns are helping to push prices higher. We think that boom in housing demand and even prices will continue through this year and demand will help to fuel double digit growth in many markets. We probably ought to expect more cooling measures over the next few years as governments try to raise tax revenue, but also try to undo or limit the asset price booms that they’ve unavoidably set in motion through the response to the pandemic.
KATE DAVIES
I’m at the other end of the telescope, I’m not the high-net-worth individuals I’m the great mass of people who really can’t afford to buy themselves a home and this is a problem that has been going on for quite some time. When I came to London, three or four times an individual’s salary would buy a good place to live and bring up a family, now people need ten or eleven times their salary to purchase anything in London and therefore, there is something fundamentally wrong with the market. The Bank of Mum and Dad is recycling money that people have made in the property market, this generation are keeping it going for young people and first-time buyers and we’ve certainly found, as everybody has probably to their surprise, that we continue to sell homes.
CEO Notting Hill Genesis
As a housing association, we provide homes for the poorer people and particularly in rented housing, but to provide these homes we have to sell homes on the open market. While our sales have been okay, it’s been a lot slower than they once were, but fortunately prices are certainly holding up. During lockdown, we’ve had to show new ways to sell like showing people around a home without actually going there, but we have kept all of our sales offices open throughout most of lockdown and allowed sales to continue. With the government’s encouragement in tax policy, I think we have had quite good successes. The experience of lockdown has made people think about the value of a home; it is where most of us have spent all of our time to the extent that we feel like we’re under house arrest. The future of people will think: is this house right for me? And this will stimulate the housing market. The discretionary spend that young people have previously had, whether it’s brunch, foreign travel or designer clothes, have not been a priority or a call in their life. Instead, the younger generation have found they can save money which leads to individual’s thinking about whether they can afford a mortgage. Other areas which contribute to the housing market include huge issues around building safety and the demand on the green agenda.
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Analysis & Insights
POLL 2
Did the Chancellors budget announcement make you more or less confident about future of the real estate market?
27% More confident
62%
POLL 1
No different to prior
Do you believe the stamp duty holiday extension is enough to fuel the residential property market throughout 2021?
Yes LIAM BAILEY
It is good but overall reform of the system is needed
28% No, it needed to be longer or go further
Stability and certainty is usually pretty good for business even if you don’t really like it at least you know where you are and I think that’s why the government keeping going on about ‘roadmap’, they’re trying to say, ‘you now know where you are’ and we’re all disorientated. Really the opportunity to encourage society to buy homes through the tax system is something you can do for a short period of time and what you gain from it you lose in other tax systems. Once society have the tax cut, it’s like a drug and people want it to go on forever. So, it’s probably not the best way to approach the whole question of getting more people housed at a price they can afford, therefore I would have to agree that long-term reform of the system is important.”
Less confident
25%
47%
KATE DAVIES
11%
The Chancellor has a difficult hand at the moment, he’s aware that he has a significant hole to fill and he’s aware raising taxes right now is the wrong thing to do in terms of the economy coming out of the pandemic, I think it needs every bit of energy it has to get going. It was probably the best that you could expect of a budget at this time. Does it change things for the real estate market?
Maybe in a few small areas, but I felt it was a bit of a holding statement and ‘let’s do the minimum we can right now because we can’t do too much’. I think the more interesting and more difficult statements come in Autumn or next year when there will have to be more difficult decisions made.”
LIAM BAILEY Most people think that stamp duty is an awful tax, you tax an activity, and you get less of it and you question why is it good to limit labour market mobility? I’ve been talking to the treasury for the past 10 years who are equally aware of the fact that this is a clumsy tax and they’ve tried to simplify it, tried to reduce the approach back in 2014, but fundamentally it’s an easy thing to tax and it’s a big chunk of cash which comes in every year. The question is, what can you replace it with, what is the alternative? It has crept up and it has become a drag on transactions, and it tends to lead to that inefficient allocation of property so that people are stuck in big houses when they don’t need them and so on, it’s not the whole story in terms of housing market problems but it is a component of that.”
POLL 3
Do you believe negative interest rates should be introduced to stimulate the economy going forward?
24% Yes
76% No
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Analysis & Insights POLL 4
POLL 5
Do you believe the 5% deposit scheme introduced is positive for the economy?
Do you believe the rise in Corporation tax was fair and appropriate?
65%
8% No, it wasn’t enough
Yes
57% Yes
35%
35%
No
No, it was too much
LIAM BAILEY I agree with the responses, I do think it is positive for the short-term as it gets people onto the housing ladder. It is not a sustainable solution, ultimately the problem we have with housing market affordability and inability to get on the property ladder and move up to appropriate accommodation for their family size is that housing is expensive in the UK, particularly the case in London. It’s not unique as a global city that faces this housing crisis, every large successful global city seems to face a crisis of this sort. These sorts of schemes are useful in the short-term but they don’t solve the underying problem and to be fair to every government that has tried to tackle this problem, the UK isn’t unique in this matter and there are few countries that have really solved this problem.
LIAM BAILEY One of the biggest problems is growth of asset prices, because of 10 years of ultra-low interest rates, the asset rich have done very well and the asset poor haven’t and this type of scheme comes in to aid that issue, but it doesn’t solve the underlying problems.”
We were in a Brexit Britain, low tax economy and let’s compete with Ireland mentality but the money needed to come from somewhere. Corporate tax is a slightly easier political sell and the Chancellor probably thought he wasn’t alone, most other big economies would have gone down the same route.”
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Overseas investment: What does the future look like? XXXXXXX
XXXXXXX
International investment into the UK, where is it today and where do you see it in the near future? LIAM BAILEY In the prime market (million pound plus in Central London) about 50% of the purchases in that market go to international buyers, having said that, half of those international buyers live in London. That quarter of the market that are overseas when buying in London (the investors), particularly form South East Asia, have been present in London during the lockdown i.e buying new build properties off plan as you would expect due to restrictions. There was an expectation from developers that more overseas investment would take place over the last 2-3 years because of the weakness of the pound and it didn’t quite transpire because of the nervousness around the outlook of the London economy post Brexit. The big new story is around greater stamp duty coming in for overseas buyers, a 2% stamp duty rate is introduced on top of normal rates and that will for the first time shift the rules from residents in the UK and non-residents in the favour of residents.
Has Covid-19 had an impact on architectural typology and building design? KATE DAVIES
The developers would argue that the benefits of overseas investment is they have a tendency to buy off plan which does tend to de-risk schemes and help provide forward funding for developments. Again, developers would argue, international investment has helped in terms of delivery volumes.”
KATE DAVIES London is an international city and it should be open for business; I’m positive about immigration, positive about selling homes to abroad, positive about labour coming into the UK and I think the more we stay open for business despite Brexit the better it is for our economy.”
I think it has raised a question on all shared housing whether it is student, retirement living or other types, there is a big question over communal living areas and how they work. This element is what makes the living choice affordable and is usually good for mental health and leading a social life so covid has created questions on how to make these safe.
Most importantly is probably providing a ‘live-work’ space at home and in the community, at Notting Hill Genesis we are certainly marketing those larger homes to have a workspace within the home. Buyers might choose to spend the money they would usually spend commuting on an extra room and these needs really need to be in the mind of the architect, developer and agent.”
I’ve also noticed in London that the local areas have come to life a bit, if you drive through places like Norbury or Shepherd’s Bush they are teaming with people in a way that perhaps wouldn’t have been before. People have only got food shops and takeaways now, but they are visiting their local high street more often for a walk or bike ride creating a concept for what a local area is. The demand is there to travel less and find supplies locally, but it’s not just the design of the house it is also the design of the community.
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Q&A with Liam Bailey YASMIN KHAN-OSBORNE
Do you expect a house price correction across the UK in the next year (excluding central London), assuming covid relief starts to pull back as the economy opens and defaults starts increasing? No, I don’t – I think you are right there are risks of to the economy as the government pulls back economic support, but assuming the rolling back of lockdown can be made permanent then most forecasters are confident that the UK will see a very strong economic recovery in 2021 and into 2022, this prospect is already lifting new house buyer registrations.
APRIL GUNN
You touched on city living making a comeback - do you expect this to be an immediate effect or longer term? I think the “move to the country theme” is overdone, yes the country house market has done very well and the past 12 months has seen a very strong pipeline of sales in rural areas, but the reality is the UK cannot support a significant exodus from the city - we don’t have the space. Cities work for most people because they are convenient, allow for strong connectivity and mean it’s easy to see friends and family. So, the city will not die. But I also suspect that the reopening of cities will create a shock for some people who thought they could avoid the office permanently. When everyone works at home then working at home is great. When half of employees are networking in the office and meetings become 50/50 virtual and physical - being absent may not feel that good. So, I think there will be a resurgence in demand in central London once we reopen the economy.
ADAM J MEHMENT
Maybe the answer is to have a progressive capital gains tax on vendors as opposed to purchasers. Purchasers would be motivated more, and vendors resigned to tax on sale to realise capital growth made. What are your thoughts? I think this could be an option, it’s always been thought to be political suicide to suggest CGT on primary residences. I wonder whether a land tax is the logical endpoint. It’s hard to implement – but if it was possible to overcome the many hurdles (regular valuations etc) then an annual tax on the value of property owned would see owners think hard about the “value” of the property to them. So, an older couple in a large expensive house would be incentivised to downsize. House price rises would be a double-edged sword – my capital value has risen but so too has my annual tax bill.
MINNIE DANDO
Do you expect that with the anticipated continuation of homeworking, city and town centre office spaces will survive and if not, is there a plan to make conversion to residential workable? The city will need to adapt – there will be more homeworking – maybe less than we think right now, but it will have an impact. Even if 10% of office space is released for other uses that is a big opportunity and a big challenge. My fear is the current evidence is most office to resi conversions have not been great products – so if we aren’t to make a mess of this, we need to resource planning departments with the right skills.
LIZ BOURKE
What are your main concerns with Construction/New Homes for 2021/22? Do you see a change in the market and is it the right time to change the Shared Ownership Model? I think the house builders will have a good year this year, most of the analyst reports are upbeat on reservations and sales volumes, I think the main issue will be an ongoing question mark over how we raise delivery volumes in the long run.
DAVID TURNER
Have you seen any interest from large corporations purchasing the office buildings they have been rented during this period? I haven’t personally - that doesn’t mean it hasn’t happened though. I think the big story has been how corporates are looking at the flexible office providers to fill a gap in their requirements.
GRAHAM OLLIVER
Business failures traditionally increase as recovery starts, how confident are you that this will not be repeated this time round? Government support has been imperative, businesses will not have a viable future and businesses rise, they are lower levels than usual in 2021 and budget meant support went on for longer that will get businesses through the weak demand period.
ANDREW DEVERELL-SMITH
If I had one million pounds to invest in property right now, where should I invest? A small flat in Central London, a number of professionals have moved from Central/Inner London to the suburbs and I predict when the city resumes to normality, these individuals will be seeking rental accomodation for a couple of nights a week.
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