However, despite a notable downturn in activities across most sectors, property has come through the pandemic relatively unscathed. Indeed, home buying reached record levels in 2021, and capital flows into real estate continued to gain momentum as investors sought a more resilient asset with a history of reliability amidst economic uncertainty.
This has continued into 2022, with homes going at their fastest-ever speed of sale, twice as quick as 2019, according to Rightmove’s house price index. At the same time, the value of property has seen monthly surges with Nationwide’s April house price index, stating that average house prices have reached about £270,000, with price rises increasing higher than 10% in each month but one in the past year.
The property boom, however, is unlikely to be mirrored to the same extent as it was last year. And with experts predicting a slowdown of market growth amidst wider economic uncertainty, it is critical that the return of international investment is capitalised on.
Critical international involvement
Without question, the reduction of international investment flows at the hand of travel restrictions took its toll on the economy, including the property market, which is deeply rooted in global investment. However, the UK has still managed to maintain its reputation as a safe haven for overseas investors due to its capital growth prospects.
According to Knight Frank’s 2022 Wealth Report, London saw more cross-border private capital in real estate than any other city in the world in 2021, with over $3 billion invested. Their forecasts estimate this trend to continue over the course of the year, with a further $24 billion expected to be invested in the capital.
This is welcome news, particularly considering the state of Britain’s housing supply chain. It’s estimated that the country needs to be building around 340,000 new homes a year to comfortably keep up with demand – of which 145,000 should be affordable.
However, trends show that year-on-year these numbers are not being reached, with only approximately 216,000 new homes built in the 2020/21 period. And despite the negative attention overseas investment receives, often becoming the scapegoat for the UK’s housing crisis, it is the boost that these investment flows introduce that can lead to the delivery of a greater number of homes. For example, pre-sales to overseas buyers enable developers to build at a faster rate, making more market and affordable housing available than would otherwise have been the case.
While historically, London has been the beneficiary of much of this, in recent years, international investors have been placing ever-bigger bets on the UK’s regional cities. Northern cities such as Liverpool, Manchester, and Leeds, and areas in the West Midlands have experienced significant regeneration and are increasingly recognised as investment hotspots offering better value for money than the capital.
Could economic uncertainty derail international investment?
While the long-term outlook of international investment flows remains positive, it is important to recognise the wider economic problems that could potentially stall this recovery.
Rising interest rates can certainly have a damaging effect on the rate of capital flow. These increases tend to be followed by higher mortgage rates. As such, overseas investors already operating on a variable term mortgage will see rates rising, while those considering taking a new one out to purchase UK property will have to factor in higher mortgage rates than the relatively low ones available during the pandemic
Meanwhile, experts are predicting that high levels of inflation are set to cool house price growth as confidence is hit by the cost of living squeeze. Indeed, prices are continuing to rise at their fastest rate for 40 years, with the Bank of England predicting inflation could climb to 11% in the Autumn.
Naturally, these headwinds will present additional challenges for investors, whose confidence could be dampened by the global economic uncertainty. That being said, real estate’s defensive characteristics and proven resilience to turmoil will likely hold sway on investment intentions. Further, the UK’s infallible reputation as a safe haven for investors will remain a strong driver of international capital flows, even in the face of delicate economic conditions.
Looking ahead, there’s no doubt that the return of international investors could provide a much-needed boost towards the country’s post-pandemic recovery, and careful consideration must be given to harnessing this investment potential for the benefit of the sector and the UK economy as a whole.
