Special Features

Brexit: No threat for residential property investors?

One year on from the triggering of Article 50 and Britain’s exit from the European Union is finally starting to take positive steps forward.

Andy Foote - SevenCapital
|
22nd March 2018
brexit question
"The main issue affecting the UK’s residential property market, which was further emphasised in the November Budget, is that the UK suffers from a critically low supply of homes versus demand in many of its key cities and towns"

One year on from the triggering of Article 50 and Britain’s exit from the European Union is finally starting to take positive steps forward.

An agreement on a transition deal announced on Monday 19 March saw the pound surge, with predictions it could grow further by the end of the week. For residential property investors, this should be encouraging, however, according to Andy Foote, director at SevenCapital, Brexit was never a huge threat for the residential property market:

Since the first announcement of Brexit, residential investors – new and seasoned – have been wavering over decisions on residential property in the UK. In fact, one of the most commonly asked questions over the past 12 months has been whether Brexit will have a negative impact on rental yields and house price growth in the coming years.

In short, whilst it would be careless to say “forget Brexit”, the answer is largely no. Nobody really knows what Brexit will ultimately mean yet, although this week’s news is certainly encouraging if somewhat unexpected – according to a recent survey by Barclays, there were few investors who expected any sort of agreement until October/November time. But what the property market boils down to, particularly for residential landlords, is demand. And in the UK, there is significant, and growing demand.

The UK has a population of nearly 70million, and the 6th largest global economy. London remains the world’s top, and most stable financial centre. So the attraction of the UK currently remains, whether we are in the EU or not.

The main issue affecting the UK’s residential property market, which was further emphasised in the November Budget, is that the UK suffers from a critically low supply of homes versus demand in many of its key cities and towns. Whilst this accounts for stock availability for owner occupiers, it applies particularly to the availability of homes to rent. An increasing number of UK inhabitants are now priced out of home ownership due to incompatible differences in the rate of house price growth versus wage rises, which means the demand for affordable rental accommodation is increasing.

This is certainly true for young people, as latest figures reveal that home ownership amongst 25-34 year olds fell dramatically between 1996 and 2016, from 55% to 34%, with house prices having risen some seven times faster in real terms than wages over this period.

Adding to this demand is the growing population, which in many regional towns and cities is being bolstered by significant levels of investment into regeneration and infrastructure attracting more business and workers to the area. For example, in Birmingham between mid-2014 and mid-2015 the population grew by nearly 10,000, yet when you consider only 780 homes were built in a year in 2016, the rates of new homes becoming available to keep up with this increase is seriously lagging.

This is not an issue that is going to be fixed anytime soon, with many major factors all contributing significantly, including housebuilding capacity, land availability and indeed land-banking, which is the subject of Sir Oliver Letwin’s review, to be revealed near to the 2018 Budget.

Subsequently, this increased demand brings opportunity for investors. Of course, whatever the economic outlook, an investor needs to do his or her homework into which areas are set to flourish and which ones aren’t likely to offer as good a return for the foreseeable future. Equally high on the priority list is the need to get up to date on tax reforms, tighter mortgage lending as well as stricter rules coming into force around energy efficiency to weigh up the right type of investment. This is all going to feature whatever the market is doing as there are always as many bad as there are good investments.

Ultimately, as a population, we are all still going to wake up every morning, eat our breakfast and go to work. As such jobs will continue to be created and our economy will grow, and whilst there remains a chronic undersupply of property, this will keep fuelling rentals higher outside of London.

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