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LexisNexis recently hosted several Managing Partner forums to review findings from our recently released Gross Legal Product (GLP) Report. A version of Gross Domestic Product (GDP) for the legal market, LexisNexis’ GLP report aggregates and leverages over 100 publicly available datasets to determine, predict and quantify growth or decline in demand for legal services across 13 practice areas. Download the full report here.
COVID-19 hit many industries hard at the start of 2020, and residential property was no exception. Unsurprisingly, with lockdown came a rapid decline in people buying and selling. With most office-based employees now working from home for the foreseeable future, commercial property has a worrying long term outlook.
Property has had a mixed performance over the past few years. Residential property performance, which is typically cyclical, has been subdued since the 2008 financial crash. Commercial property on the other hand, has been relatively unaffected (bar retail space) in recent years until the onset of the COVID-19 pandemic. This had manifested in a 15% growth in demand for legal services from 2017-2019, according to the GLP Index report.
However, it wasn’t a pretty picture for the legal property transactions in the first half of 2020. The LexisNexis GLP report showed property completions in March 2020 were down 70% versus March 2019 and the top 5 UK landlords reported that 50-70% of Q1 rent had not been paid by tenants. Re-opening the market has had some impact, however transactions are still far behind 2019 levels, with a 33% decline vs 2019 levels as of July 2020.
But is it all doom and gloom? During discussions in the GLP forums, most Managing Partners agreed that the initial outlook was bleak, particularly in March and April.
Although completions are still down, many Managing Partners noted that their residential property instructions have bounced back and in some cases were at higher volumes than work undertaken in 2019. It remains to be seen whether this is a leading indicator of a material recovery in transaction volumes, or whether lots of these instructions won’t go the full way through and complete.
There are also several nuances within property. Unsurprisingly, commercial and retail work has been slower, whilst agriculture and development work remain strong. Feedback from our Managing Partner forums has maintained that the impact of COVID-19 on the property market was very much market based; higher value property markets like that of London, for example, saw a slowdown, whilst markets like Milton Keynes, where the work is dominated by new build property sales and first time buyers, weren’t affected as severely.
There are still many unknowns however, with Managing Partners stating that they didn’t know if this uptake in demand would sufficiently counterbalance losses from earlier in the year – “Whether we are on the top of the wave or on the way down, I am not sure – we will see just have to see with completions”.
So, what does the future look like for the legal property market? Was the demand upswing many firms experienced in July a sign of a wider market recovery or is the recent hike in transactional activity just pent up demand destined to die down?
There are a number of factors at play. Unfortunately, much of the impact of COVID-19 is expected to linger for years to come. Job security uncertainty will be exacerbated as the government wind down the furlough scheme, and culturally new norms will govern over lives. With working from home being the new norm, will people start moving away from the expensive, busy metropolitan hubs like London? Will commercial teams start seeing an uptick in work when clients want to renegotiate long-term commercial leases?
There are also political dynamics: Stamp Duty costs have been reduced until early 2021 but the Managing Partners were unsure as to the long term impact of this measure. While most thought it had increased short term interest from buyers, LexisNexis presented analysis of previous stamp duty cuts - which were quickly absorbed into higher prices. During previous Stamp Duty holidays, HMRC found that the cut was swiftly capitalized into prices and most of the buyers who benefitted from the relief would have purchased property anyway. In a further headwind, banks and mortgage brokers have signaled that those who took mortgage holidays during the pandemic are likely to find it harder to re-mortgage or take out further loans.
To try and predict the estimated length of full recovery for the industry, the GLP report includes plotted transaction volume recovery from the last two major recessions. Generally, house prices took either 23 (early 1990s recession) or 25 (2008 credit crisis) quarters to return to pre-recession levels (see fig. 4.11.5 below). Transaction volumes are even slower to recover. It took 51 quarters to return to pre-1990 recession levels and volumes have still not returned to pre-2007 levels, 52 quarters later.
Although the COVID-19-induced recession is of a different nature - demand or market sentiment may recover more quickly than in previous instances. However, past precedent suggests that it may take years for residential property activity to return to 2019 levels.
[LexisNexis GLP report, 2020]
While for many firms, residential property matter creation has bounced back in the last few months, it remains to be seen whether the trend will continue throughout the remainder of 2020 and in to 2021. The next GLP report, scheduled to be released in September will give us further insight into the rapidly changing landscape.
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