UK Market Update

1 June 2017
London skyline

Brexit and an upcoming general election currently dominate UK-related headlines. We survey the market and explain why Outer London and regional cities continue to be our focus.

ELECTION PUTS RESIDENTIAL PROPERTY MARKET UNDER THE SPOTLIGHT 

Prime Minister Theresa May claims that the vote on 8 June is an exceptional one – “the most important general election in my lifetime” – yet when it comes to housing policies, there’s a strong element of deja vu. 

One particular issue has been a political talking point since at least the 1970s; namely, the number of houses being built isn’t sufficient to keep up with population growth and years of under-supply. The main parties are in agreement on at least one thing: the UK needs between 225,000 and 275,000 new homes each year. Given that work started on just 142,890 units last year, something needs to be done to address the supply gap. 

The ruling Conservatives are overwhelming favourites to win the election. Assuming the pollsters are correct, we can expect business as usual on the policy front, which in all likelihood will mean moves to implement the measures outlined in the government’s policy blueprint, Fixing our broken housing market, published earlier this year. 

This policy document provides encouraging reading for foreign investors. In some global markets, we’ve seen a pandering to populism, including foreign buyer property taxes and other admin hurdles. The UK government, by contrast, takes a very different line. The emphasis is on diversifying the market; in providing the support necessary for “a more diverse and vibrant market that is more responsive to demand and gets more homes built”. There’s recognition of the importance of the buy-to-let sector (“We need more good quality privately rented homes”) and a commitment to make the planning process more efficient to “build homes faster”. 

So longer term, what impact is the general election likely to have on the UK residential property market? 

We’d suggest the following: 

  • Business as usual. The UK government recognises that a range of actors (including private investors) have a role to play in getting new projects completed. The UK has presented an ‘investor-friendly’ environment for decades. Nothing looks set to change here. 
  • Currency to strengthen. We expect to see the Pound continue to steadily strengthen, with an acceleration should Theresa May win her landslide victory – a strong positive outcome for financial markets and investor sentiment. Therefore we recommend USD-pegged investors to move early to take advantage of their current buying power.
  • Less red tape and more opportunities. From getting planning permission for brown field sites, through to simplifying conveyancing, there’s a renewed emphasis on cutting out unnecessary cost and delay in getting projects off the ground. Good news for occupants, developers and investors alike.
  • Sustainable growth. High demand is hardwired into Britain’s residential property market. Even if the government hits the target of 200,000 new homes a year (which, on past evidence appears to be aspirational rather than realistic), it’s not going to be sufficient to satisfy demand. 

THE ECONOMY: POST-BREXIT, UK PROVES ITS RESILIENCE

“Cautiously optimistic” best sums up the current mood among businesses, consumers and analysts.

Some had predicted that a Brexit vote would plunge the City of London into chaos; but the mass exodus failed to materialise - and in March we saw London retain its mantle as the world’s top financial centre on Z/Yen Group Ltd’s Global Financial Centres Index

Likewise, April saw yet another fall in the jobless total, meaning that at 74.6%, the UK’s employment rate is now at its joint highest since records began in 1971. Encouraging signs of resilience across the economy recently led JP Morgan to bump its 2017 growth forecast for the UK by 0.2% to 1.9%. Business momentum is expected to pick-up as we head into the summer, and the business activity index also rose to a four-month high of 57.1 in April, the second-highest reading since mid-2015. Evidence suggests that households are reining in spending in light of the fall in the value of sterling. Surveys point to a cautious “fairly upbeat” attitude to the short-term economic outlook among homeowners, with 58% expecting house prices to rise over the next 12 months. 

A poll of 30 economists and analysts earlier this year suggested that for the UK as a whole, 2017 looks set to be a year of “modest growth” on the house price front, with increases forecasted at 2.5% this year, 2.3% in 2018 and 3% for 2019. The London market has since shown signs of a rebound and in February, UK house prices rose at the fastest pace in a year. Outside of London, core regions like Manchester and Birmingham are also posting record levels of price growth.

A growing population, supply-side shortages and a resilient economic picture all combine to paint a picture of long-term stability for the UK as a whole. That said, certain regional cities and outer areas of London are worthy of special attention. Each has its distinct drivers, but all share certain characteristics: 

HOW TO SPOT A PROPERTY INVESTMENT HOTSPOT: 

  • A robust local economy
  • A dynamic, growing population
  • Regeneration and transport infrastructure investment 
  • A strong track record. These are cities that have been shown to outperform the wider market in terms of rental yield and medium to long-term capital growth

Here’s why outer London and the key UK regional cities Birmingham, Manchester and Liverpool will continue to be our focus:


Greenwich Foot Tunnel

OUTER LONDON

In April, London’s Purchasing Managers’ Index rose to a 16-month high of 56.9 while the Federation of Small Businesses reported that confidence among London’s SMEs was at its highest level in over a year. Economically speaking, the capital is buoyant – yet in a city of over 8 million inhabitants, it’s always going to be the case that some areas deliver better returns than others. The smart approach for property investors involves pinpointing the areas with the greatest scope for added value. 

According to the Land Registry’s figures from February, the average house price for London stood at GBP477,300; more than twice the UK average. Yet prices in the capital as a whole rose by just 3.7% year-on-year in March, compared to a 6% average increase for the rest of the country. 

The story of London appears to be a ‘tale of two cities’. We’ve seen accounts of estate agents giving away cars and iPads to seal the deal on prestige properties; telltale signs that the central London market is flat, over-inflated and in need of readjustment. 

Move away from the centre into key outlying locations, and it’s a different story. Honing in on one bedroom flats, they show that prestige areas such as Westminster and Kensington & Chelsea struggled to reach positive capital growth last year. Meanwhile, boroughs such as Greenwich, Lewisham, Southwark and Croydon all saw sales price growth in excess of 21%. 

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These out-performing areas tend to display the following characteristics: 

We will continue to focus heavily on Outer London for the foreseeable future.


Birmingham

BIRMINGHAM  

  • This West Midlands powerhouse is home to over 1.1 million people. Some 89,000 new housing units are needed by 2031 to meet projected demand.  
  • The city awaits an exciting connectivity boost in the form of High Speed 2 (HS2), which will reduce train travel times to London to just 49 minutes. 
  • There has been a strong emphasis on regeneration: the Big City Plan involves transformation of the city centre, including 50,000 new jobs and thousands of centrally located new homes.  
  • The city hosts a diverse economy. Big corporates such as HSBC, Deutsche Bank and PwC have a major presence, while the city is home to more startups than anywhere outside London. 
  • Average city centre 2-bed purchase prices stand at around GBP250,000 - making this an accessible market for occupiers and investors alike.  
  • Strong demand compared to supply, with an estimated 15 buyers to every available unit 
  • 21.7% capital growth is forecast between 2017 and 2021. Rental yield growth of 17.6% is forecast for the same period.

Manchester

MANCHESTER 

  • Central Manchester’s population grew at a rate of 17.8% from 2003 to 2013; double the national average. This growth has exceeded expectations: future projections have been revised upwards from 560,000 by 2025 to 615,000 by 2022. 
  • The city requires a minimum of 2,500 new homes per annum over the next decade. A shortfall of 10,000 new homes is forecast in Manchester to 2021. Despite the government's efforts to stimulate construction, there were just 1,524 completions in 2015/16.
  • HS2 will cut travel times to London from around 2 hours, to 1 hour and 8 minutes.  
  • A wave of regeneration has seen the arrival of high quality mixed-use destinations such as MediaCityUK and Spinningfields. Theatres, exhibition spaces and entertainment complexes have transformed Manchester into a major cultural hub. 
  • Manchester is the UK’s biggest centre for professional and financial services outside of London. It is also home to a major creative and digital cluster.  
  • Average property prices are two thirds lower than London, whereas wages are just 30% lower than the London average.  
  • Property prices have increased by 16% in 2016 alone. 
  • 28.2% capital growth is expected between 2017 and 2021. Rental yield growth of 20.5% is forecast for the same period.

Liverpool

LIVERPOOL 

  • Liverpool’s population is set to increase by 83,000 to 1.6 million by 2040. Planners are struggling to keep up with demand: last year, the number of new projects was 25% below the Mayor’s target of 6,500 new homes. 
  • HS2 will cut journey times to London from 2 hours to 92 minutes via Crewe. 
  • The city is about to see the biggest regeneration project in its history: a GBP5 billion transformation of its world famous Central Docks.  
  • As well as being a world centre for wealth management, Liverpool enjoys the second fastest digital and creative sector in the country. 100,000 extra jobs are anticipated by 2040. Collectively, its four universities account for a student population of 66,000 - and 60% of them stay in the city after graduation. This population - many of whom join the city’s tech and professional sectors - drive demand in both the ownership and rental sectors.  
  • The city saw 6.6% year-on-year capital growth to September 2016. 22.8% property price growth and 16% rental growth is projected by 2021.

THE FUTURE 

There are no indications that the UK’s investor-friendly landscape will be affected by the upcoming general election. The UK economy has demonstrated - and continues to prove - its resilience in the aftermath of the Brexit vote. For the market as a whole, 2017 looks set to be a year of cautious optimism. That said, outer London and key regional cities look set to remain prime hunting grounds for opportunities capable of significantly outperforming the wider market over the medium and long-term. 

 To discover your next UK investment opportunity, speak to IP Global today.

IP Global

Written by IP Global

IP Global’s full-service approach is built on extensive market research and analysis combined with a significant financial commitment to every investment we offer. We are able to manage the entire investment process end-to-end, from sourcing, financing, and management to those all important exit strategies, making investment in real estate as straightforward as investing in more traditional asset classes. Our expertise, experience and strong record have produced over USD2 billion in international real estate investments in over 30 markets worldwide.

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