“It’s more stable and less volatile than my stock investment portfolio”. As part of a survey last year,– and this response was typical. Time and again, the themes of stability, reliability, diversification and low correlation with other major asset classes were raised. As we move into 2017, evidence suggests that these attitudes are typical of sentiment across the globe - and for good reason.
The big picture: investors look above the fray of global political and economic risk
So what’s the broad economic picture for this year? The knee-jerk reactions of 2016 seem to be behind us; major stock exchanges have long since bounced back following the shocks of the Brexit vote and US presidential election and there’s a strong sense of “business as usual”. The most recentmirrors the broad consensus of analysts: all being well, 2017 should be a year of “modest growth”.
Yet global economic and political uncertainty mean that these broad predictions come with a very clear health warning. Will Chinese rebalancing be managed successfully? Will consumer markets remain resilient? Is the US about to start shredding its trade agreements? In light of these potential pitfalls, it’s not difficult to imagine situations where investors are left exposed across multiple asset classes.
It remains as important as ever that portfolios are fortified with assets that are ‘above the fray’ so far as economic and political risk is concerned. This helps to explain why property - and in particular, residential property - looks set to become even more of a key investment lynchpin in 2017. It also helps to explain why tried-and-tested markets in the UK, US, Australia and Germany require special focus.
Need a safe haven? Look to the fundamentals
In an uncertain environment, wealth preservation and the need for asset diversification look set to remain top priorities for investors.
Our own survey demonstrated the enduring popularity of property for foreign investors as a reassuringly tangible asset that can help to mitigate exposure to volatility in their home markets.recently highlighted what looks set to be a growing trend this year: namely, that “investors will need to consider trends and asset classes that are not affected by policy”. In other words, the need to look beyond the indexes and focus on the fundamentals, including “urbanization, technological innovation, population growth and ageing”.
Residential property investments in prime urban centres such as Melbourne, Berlin and Manchester speak directly to this mindset. These are mature, safe markets, but ones in which the fundamentals (supply-side shortages, population growth and the desire to be part of an ‘urban hub’) deliver the potential for attractive yields and long-term capital growth.
Not only do these type of investments tick the right boxes as “safe havens”, they also open up valuable long-term opportunities.
Brexit and beyond: smart investors commit to longer-term holds
Shortly after the UK’s EU referendum and the subsequent slump in Sterling, British residential property suddenly became up to 20% cheaper for USD-pegged foreign investors.
So far as the residential market is concerned, in the immediate term, we expect an inevitable climate of volatility as the evolving political situation leads to what are essentially knee-jerk reactions.
Not that this should deter foreign investors; in fact, far from it. In the aftermath of the vote, we highlighted how Chinese investors were casting an eye over the UK market with renewed enthusiasm and in ever-greater numbers; recognising it as “the same old safe haven as ever - but cheaper”. More recently, thewas reporting that almost three quarters of Chinese investors believe Brexit represents a good opportunity to invest in UK real estate within the next five years.
Over the next year we expect a clearer picture of a typical overseas investor in the UK to emerge. They will recognise that now is the time to take advantage of the currency situation. But equally as important, they will also look beyond any immediate volatility and focus on what underpins this highly-reliable market: an entrenched supply gap and ever-growing demand.
It’s a case of “business as usual” so far as these fundamentals are concerned: 2017 provides the ideal entry-opportunity, combined with a widespread desire to commit to a longer-term hold to ride out any short-lived storms.
A tighter tax and mortgage lending landscape
Foreign investors are now firmly on the radar of policymakers and regulators. In what looks set to continue to be a low interest rate environment, institutions across the globe are tightening up their lending criteria. Meanwhile, in British Columbia, Australia, the UK and Hong Kong, we’ve already seen stamp duty rises focused on the buy-to-let sector. Expect more of the same in 2017.
No investor relishes more red tape or tax hikes. But it’s worth remembering that robust oversight of lending and attempts to rebalance and temper the property market are both very healthy signs of a mature market. To take the UK as an example; with the extra layers of stress testing and due diligence introduced post-2008, the mortgage lending industry is more resilient than ever. All of this helps to eliminate vulnerable buyers and prevents bubbles from emerging. In short; if you are looking for a ‘safe’ market; these can be valuable trust indicators.
This approach can also have a positive impact on investors in terms of yield. After all, if a policy achieves its desired effect of weeding out ‘unsuitable’ buy-to-let landlords, rental options for tenants become scarcer and market rental rates increase - along with yields.
London Mayor Sadiq Khan recently announced an enquiry into foreign property ownership, reminding us that policy in this area is increasingly dictated on a highly local level. In 2017, it’s not enough to have a broad overview of a country’s tax and lending regime before making a purchase. Investors should look for advisors with detailed knowledge of what’s happening on the ground to navigate what are often complex local rules.
Where are we investing in 2017?
Our policy of targeting new pockets of value in high-potential new and existing markets will continue in 2017. Here’s a snapshot of our key markets:
UK MARKET SNAPSHOT
Where to invest
Greater London, Manchester, Liverpool, Birmingham
- 4.9% average annual capital growth for London property over next five years
- 5.3% average annual capital growth for Manchester for the next five years
- Up to 7% gross rental yields currently available in Liverpool
- Regeneration, transport upgrades and relative affordability mean Outer London and core commuter cities are booming, yet accessible
- Manchester and Liverpool are both primed to benefit from the Northern Powerhouse initiative
- High Speed 2, strong population growth and its position at the forefront of the government’s policy of rebalancing the UK economy will drive Birmingham forward
- Spring 2017: the government will likely unveil its Brexit negotiating position. Expect volatility in the markets to decrease as the political situation becomes clearer.
- 8 March: the Spring Budget. Look for announcements on big infrastructure projects to temper the effects of Brexit - and any potential investment opportunities that flow from them.
AUSTRALIA MARKET SNAPSHOT
Where to invest
- Strong population growth expected in thriving cities
- Rental vacancy rates for Melbourne and Sydney are extremely low at 2.1% and 1.9% respectively, highlighting a significant undersupply issue
- Cities all hubs for major transport infrastructure development
- 11% rise in Melbourne property prices in 12 months to November 2016
- 13% rise in Sydney property prices in 12 months to November 2016
2019: next general election
NORTH AMERICA MARKET SNAPSHOT
Where to invest
Chicago, (with Toronto, Los Angeles and Boston metros also on our radar)
- Chicago listed as most undervalued of financial cities by UBS
- ‘Chicago Connector’ set to open up metro areas
- A booming tech and financial hub (HQ to 35 Fortune 500 companies)
- Chicago property prices still 17% below peak, offering average rental yields of up to 7.9%
- Toronto condominium prices up 9.6% year-on-year to Q3 2016
January 20: inauguration of President Trump. A protectionist stance could make things tricky for foreign investors. Alternatively, commentators have suggested thatand loosen lending restrictions could boost the market. It’s a matter of wait and see.
GERMANY MARKET SNAPSHOT
Where to invest
- 400,000 new residents expected by 2030
- 40% housing supply deficit
- Berlin ranked #1 in Europe for investment prospects and capital value increases (PwC and Urban Land Institute)
- Berlin new build apartments up 13.2% in 2015, with rents up 5.7%
2018: opening of the long-awaited Berlin Brandenburg Airport, which looks set to increase Berlin’s credentials as a global hub.