CONCRETE ANALYSIS

UK property market sees renewed investor interest as Brexit fears fade

Growth in the lettings market makes country attractive to investors looking for yields, capital appreciation

PUBLISHED : Tuesday, 06 December, 2016, 4:02pm
UPDATED : Tuesday, 06 December, 2016, 7:58pm

Almost six months after the United Kingdom voted to leave the European Union, investor sentiment about the property market is returning to where it was at the start of the year.

According to data from the Royal Institution of Chartered Surveyors, who conduct a monthly survey of hundreds of estate agents for their views on the UK residential market, enquiries from new buyers are now at a level close to where they were in February, and the trend line since the vote in June has been steadily improving.

Our conversations on the ground in international markets show that foreign property investors accept Brexit as the new normal, and they are moving on in this new reality. For some buyers, this is helped by the weakening pound, which has made UK property around 20 per cent cheaper compared to this time last year for those buying in US dollars, or currencies pegged to it such as the Hong Kong dollar. This is one reason why foreign investment has been sustained following the vote.

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One of the major trends we are seeing following the referendum is increasing rental demand, which is driving growth in the lettings market alongside that in the sales market. Although capital growth remains healthy, we are especially seeing rental yields are on the rise. One of the main reasons for this is the simple rule of supply and demand: the UK continues to add housing capacity at a rate far below what the government estimates is required. In 2015 and 2016, for instance, 139,650 new housing units are expected to be completed in the UK, whereas the department for communities and local government puts the need at between 232,000 and 300,000 new units per year. Even if Brexit does have an impact on population growth, the gap between demand and supply is vast and we do not envisage it being bridged any time soon.

Growth in the lettings market makes the UK increasingly attractive to investors looking for yield as well as capital appreciation, and this is a trend that should continue, with stronger yields in the years to come. What is more, rising yields fuel demand from the private rented sector – funds and institutions who ‘buy to rent’ – which will further constrain supply and drive up demand and prices, something we expect to see more of next year.

Investors in London may be concerned at the news that London Mayor Sadiq Khan has launched an inquiry into foreign property ownership. Khan has acknowledged the real concerns of Londoners about the proportion of homes being purchased by overseas investors. But, there are reasons to feel positive about possible future policy moves: a document recently sent out to potential bidders for the research included a clause to explore “the positive role that overseas buyers play in enabling developments to go ahead.”

Brexit not seen affecting stability of UK property market

This suggests that the inquiry will take account of the many benefits foreign investment can play as part of a stable development mix: by supporting developers, foreign investors enable new homes to be built, a crucial argument that is not heard often enough. Early off-plan sales to foreign buyers allow developers to unlock capital in the early stages of a project, and demand from them stimulates further development, improving delivery of affordable housing in parts of London that have urgent need for it. Of course we cannot prejudge the results of the inquiry, but it is good to see that the positive impact of foreign investment into London’s residential property market will be included.

At the same time, in an attempt to stem further property price growth, the government is tightening restrictions on the buy-to-let sector, for instance by changing the law so that landlords will no longer be able to offset the cost of their mortgage interest against their rental income when calculating tax due. Some of these measures have understandably been unpopular among the landlord community. Last week’s Autumn Statement, the first for new chancellor Philip Hammond contained some good news in that lending restrictions, which would have made it more difficult for buy-to-let investors to borrow funds, were not tightened.

As expected, Hammond also discussed infrastructure investment. During uncertain times, the UK has historically invested in this area, and the chancellor confirmed an increase in spending, as he unveiled a new £23 billion National Productivity Investment Fund, aimed at raising the UK’s productivity in infrastructure across a range of areas, as well as revealing the government’s Northern Powerhouse Strategy.

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HS2, the UK’s planned high-speed rail network, is fundamental to the government’s Northern Powerhouse scheme, which is driving value in cities such as Manchester and Liverpool. The Northern Powerhouse is the UK government’s plan to create better connectivity between Manchester, Leeds, Hull, Sheffield and Liverpool in order to create a powerful economy for the region. The government is investing £13 billion in a variety of transport schemes including the HS2 which connects the North and South of England, HS3 which will run from East to West through Manchester and 40 major road schemes. This will increase domestic connectivity, reduce travel times and thus facilitate the growth of the Northern economy. The vision has already delivered strong results with over 8,000 new jobs created over the past four years and 850,000 more to be created by 2050.

All these major structural changes show that, even with all the uncertainty around the timetable for Brexit, which is likely to continue throughout 2017, the UK is still certainly worth considering for foreign investors seeking returns in the recommended medium to long term investment hold. Beyond the noise, there are great opportunities to be realised.

Hamish Pound is senior investment manager of IP Global

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