At the end of January, 16 cities housing over 46 million Chinese residents were placed on lockdown. Measures to contain the virus such as having people self-isolate has meant the economy has taken a hit, as people are spending less and unable to work. Although no one can say for certain what the effects on the economy are, estimates predict that China’s annual GDP growth could fall by 2-4 percentage points per quarter. The repercussions are felt more widely, as the virus spreads and depending on the country’s contingency plans, many more people self-isolate. Travel and tourism also take a hit. Thailand for example gets a quarter of its visitors from China, yet tourist numbers were down 70% in the first ten days of February.
Residential sales in China’s 70 largest cities were down 90% when compared with the same period last year. According to figures released by China’s National Bureau of Statistics, house prices rose just 0.27%, the slowest growth in two years. To counteract the slow take-up of new homes, property developers in China are coming up with inventive ways to entice buyers. Evergrande Group, China’s leading property developer, is offering its largest ever price cut which included 25% off housing purchases until the end of February and 22% off until the end of March.
The property sector in China is expected to bounce back relatively quickly. Within the next few weeks branches are expected to reopen and viewings will resume. If the virus is contained quickly, the demand for property would have only been delayed.
Since Boris Johnson won a Conservative majority in December 2019, confidence in the market has soared and the economy has stabilised. Many were withholding a move until there was more clarity with regards to Brexit, and after that was granted the pent-up demand was unleashed. A 2.9% quarterly rise to February 2020 meant that house prices grew at their fastest pace since October 2015. Since then, there has been a Coronavirus outbreak and the property market could be heading for another bump in the road.
The impact of Coronavirus on the UK housing market is not entirely certain. It is true that it has made it difficult for new-build developers to promote their properties to potential investors in China, and travel restrictions mean that global efforts are somewhat stunted. Since the Coronavirus outbreak in the UK, a small percentage of people have reported that they are delaying buying / selling their home until the virus subsides. We think demand for housing is likely to slow until the virus is contained, and this could have a temporary effect on prices.
The government and the Bank of England are taking steps to stimulate the economy and minimise the impact of Coronavirus. The Bank of England has cut already-low interest rates from 0.75% to 0.25%. Those who have taken out buy-to-let mortgages which are generally lent on interest-only will almost certainly feel the benefit. A 0.5% drop in interest rates equates to a saving of around £40 a month for every £100,000 borrowed.
The cut in interest rates combined with low mortgage rate availability is beneficial to investors. Those considering buy to let investments may find the current environment ideal, especially if they choose an area with the scope for high capital growth. Luton for example, was voted the top commuter hot spot in 2019. The demand for rental property is there, as between 2018-41, the Office for National Statistics expects the town’s population to grow by 12.9%, to 248,500. According to Ascot Mortgages, capital growth for Luton properties is at 10.29% and rental prices have risen by 6.81%. Apartments in developments such as the Orion start from £179,900 which is already 10% below market comparables and upon completion in Q4 2020 they are expected to be worth £202,308.
Some property sectors are only UK-focussed and therefore would not be affected by travel bans and isolation. Care homes for would still be operating regardless of the outbreak as there is consistent demand. According to the Centre for Ageing Better the number of people aged 65 or over is expected to increase by 40% over the next 20 years.
In the long term, there is a sustained need for care homes. The government is not bridging the gap between the number of care home beds available and the number that is needed. Research from Knight Frank has shown that the UK is already short of 100,000 care home beds and this is likely to worsen over the next two decades unless existing stock is upgraded, and new care homes are opening at a faster pace. Due to financial restraints, we do not see this happening.
Due to the demand, care home investments are becoming more attractive to investors. Rooms in developments such as Duchess Gardens can be purchased for £77,400 offer an 8% return for 22 years and buy-back options. It is run by an experienced management company and is fully operational so investors can enjoy immediate income.
In conclusion, we think that any impact the Coronavirus will have on the UK property market will be fleeting and mitigated by the measures the government has put in place to minimise the impact on the economy. Low interest rates means that getting a buy-to-let mortgage is even more affordable than ever and could positively affect the profitability of the rental sector. Demand for care homes is underpinned by the country’s ageing population and is not affected by travel bans or international affairs so remains a strong investment.
Contact One Touch today to learn more about investment property and the effect Coronavirus will have on the market.
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