Brexit: Our view on what it means for the UK property market?
BREXIT… Our view on what it means for the UK property market
(Sent: Wednesday 20th July 2016)
On Friday 23rd of June, Britain (despite just how narrow the difference was) voted to leave the European Union to the surprise of many. We cannot say we expected this outcome which is why, as a business owner, it has understandably taken some time to completely digest.
Why have I chosen to push on and continue business as usual you ask? Well that is easy. This is because I remain optimistic about the future of the UK and the UK property markets.
In my e-mail to you today, I will outline why I am confident about the UK and the UK property market after Brexit, and give my recommendations on property investing and types of properties to consider in the current climate.
Why the UK Is in a Strong Position Now and after Brexit
Following the Referendum, the markets have not experienced the turbulence in the markets that was predicted if there was a ‘leave’ vote. Indeed, the FTSE 100 is now trading higher than it was pre-Referendum. And pound sterling has started to climb back from its post-Referendum low.
Firstly, over the past seven years, the Bank of England has consistently strengthened the UK financial system. The capital requirements of the UK’s largest banks are now 10 times higher than before the crisis of 2008. The Bank of England as said in its press release “can take whatever action is needed to promote monetary and financial stability, and as a result support the real economy.”
Secondly, the UK is the 5th largest economy in the world, an economic powerhouse and Europe’s fastest growing economy and will continue to be a magnet for international investment. The UK has world beating industries including: financial services (City of London is no. 1 in the world), pharmaceuticals, manufacturing (automotive and aerospace…) universities, public services, medicine, creative/media, and tourism. It also has a highly skilled workforce. All of the aforementioned will maintain the UK’s role as a highly desirable trade partner and a smart long-term choice for investment.
More jobs were created in London in the last Parliament than in Europe, according to the BBC.
The UK also continues to punch above its weight on the diplomatic front. This includes via its ‘special relationship’ with the US and the Commonwealth of 53 nations.
Thirdly, we now have a new Prime Minister Theresa May in just 20 days following the Referendum. This was expected to take another 9 weeks with the new prime minister not being appointed until 9th September. Her appointment has already brought political and economic certainty to the domestic and international markets, following the initial Brexit panic.
I am confident the Prime Minister will negotiate the best trade deals for the UK for it leaving the EU. Already, Australia has called for a free trade deal with the UK following its exit from the European Union (source: BBC).
To summarise, the British economy has strong fundamentals. The economic success of the past 5 years means that the UK is much better able to withstand any future turbulence. Standard & Poors, the world-renowned international rating agency, has forecasted that economic uncertainty in the UK will be short-lived.
Why UK Property Will Remain a Smart Investment Choice
There continues to be a strong case for security of bricks and mortar. Property will continue to provide steady returns as well as capital growth. The fact is the value of your property cannot be wiped out overnight unlike other asset classes. Property also does not have experience the volatility of the bond and equity markets.
RightMove just reported on 18th July that the price of property coming to the market has fallen by only 0.9% this month. “This is within the usual expectations for the run-up to the summer holiday season.” (Miles Shipside, Commercial Director)
RightMove also wrote: “Most agents report market momentum continuing due to shortage of suitable property for sale – buyers fearful of missing out on scarce choice, and affordability and availability of lower mortgage rates.”
Over the long term, UK property as an asset class is a sound investment. There is a chronic under-supply property in the UK coupled with a rising demand, and the forecasts indicate this will continue, even if the UK leaves the EU.
Generally investors dislike uncertainty, but during periods of uncertainty is when the best opportunities present themselves.
What makes the UK property market a safe, secure and lucrative investment amongst investors is not tied to the UK’s EU membership. The high rental returns will continue after Brexit. Even if there is a period of property prices staying flat or slightly decreasing, prices will recover. One of the key reasons property prices will recover is that there is a big under-supply of property in the UK. Under the laws of supply and demand, a shortage in supply with a healthy demand will push the price up!
Some will use Brexit as an excuse to do nothing and wait and see. The problem with this is that when everything returns to normal, you will have missed out on the best opportunities.
The other problem is that by holding your money in the bank at circa 1% interest (it is likely the Bank of England will decrease interest rate from 1.0% to 0.5% in August) is that as an investor you are losing money in real terms as inflation is higher than 1%.
So you could purchase a flat for £100K TODAY and get a 6% NET yield (£6,000) or keep the money in the bank and earn interest of £1,000. Money earned from purchasing a flat does not include capital growth!
Opportunities to Purchase NOW with Low Pound Sterling
Following the Referendum, pound sterling is the lowest it has been in 31 years against the US Dollar. This is not the first time that the UK has experienced devaluations in the pound sterling. They have been followed by periods of economic expansion, and the recovery of the pound.
A low pound sterling creates opportunities for property investors paying in foreign currencies to make substantial savings by purchasing NOW. As an example, a 1 bedroom property in the hot Crossrail market of Slough, an investor can save $30,800 on a purchase price of £237K by purchasing TODAY.
Our Recommendations: UK Property Market
We continue to recommend investors purchase residential buy-to-lets. There simply are not enough homes in the UK! There is a chronic shortfall of properties in the UK coupled with an increased demand. The under-supply of properties will lead to increased prices.
So you can purchase now and pay LESS or purchase later and pay MORE.
We would be delighted to speak to you about our recommendations for residential buy-to-let properties.
Commercial Buy-to-Let Properties:
What a Brexit has unintentionally done is opened up doors to some exciting opportunities for those of you hoping to profit from sectors you may have been afraid to explore or not known about.
Investment in care homes and hotels is a growing sector with very sustainable demand sources. It will continue to grow and is unaffected by Brexit.
They provide high fixed returns over 10 years, require a low capital outlay from £40K, are exempt from stamp duty, and are fully managed for you with no extra costs incurred during ownership.
We have had a flurry of enquiries for hotels and care homes since the Referendum. What our buyers like about them in the post-Brexit world is they provide a fixed rate of return, have no extra costs during ownership, giving them peace of mind and mitigating risk.
For those of you who are purchasing a property to supplement your income and need to know what you are paid is fixed year in and year out, we recommend that you look at the care home and hotel investments. We have had a number of investors who have bought because they wanted to supplement their income, and need to be certain of how much money they are getting.
UK Hotel Rooms:
The UK tourist and hotel industry continues to be very strong, with rising occupancy levels in UK hotels (tourist and business). The UK is a key destination for tourists worldwide and has been so since the beginning of the 20th Century. With the fall in the pound, the UK is poised to see an increase in tourism across popular UK destinations due to a weaker sterling. Whilst UK residents will likely avoid overseas holidays due to increased costs, opting instead for domestic travels for their holidays – ‘staycations’ in UK hotels. Even when the pound recovers, the UK hotel industry will continue to be buoyant.
Another sector to consider is UK care homes. Care for the elderly generates in excess of £14.5 billion for the UK economy. The UK population is ageing and the number of those aged 65+ is expected to increase by a further 1.1 million and the numbers aged over aged 85 by 300,000 in the near four years (parliament.uk). The increasing demand for quality care with an ageing population will not be changed by the referendum result.
My email is longer than I intended. I would be keen to hear your comments.
If you would like some advice or simply want to discuss anything that interested you, in more detail, please phone, email me or drop by our office in St John’s Wood, London.
Jean Liggett, MBA