Where Is UK Residential Property Headed In 2017?

20 December 2016

What can investors expect over the coming year? Hamish Pound, Senior Investment Manager at IP Global, looks to the future

As we’re constantly reminded, 2016 was a year of change. In fact, so loud and frequent are the claims that the landscape is now “fundamentally different” that there’s a danger of taking this at face value - without taking into account what’s actually happening on the ground. 

The UK residential property market is a case in point. Are things different? Much, of course, depends on your perspective; as a USD-pegged outsider looking in for instance, you certainly wouldn’t be alone in looking at newly-affordable UK bricks and mortar with special interest. The forex “Brexit bonus” means British property is now up to 20% cheaper for many foreign investors - with no sign that this is likely to be reversed in the near future.  

So what else has changed? The answer is surprisingly little. As a spokesman for Juwai, China’s biggest international property portal put it after the Brexit dust started to settle (and after a 40% upward spike in sales enquiries), “the UK looks like the same old safe haven as ever - but cheaper”.  

Indeed, a recent survey we undertook of over 500 investors confirmed that in turbulent times diversification – via investing in stable overseas property markets – is one of the most significant benefits of foreign property investment.  

It looks set to be case of “back to basics” in 2017; investors looking at the fundamentals that have marked out UK residential property as a stable and reliable medium to long-term asset class - and realising that this landscape remains both familiar and investor-friendly. 

Here’s a closer look at our predictions: 

1. Brexit becomes the new normal 

A pattern emerged after the Brexit vote; panic on the markets followed by a correction. The FTSE 100 hit a record high in October, while the FTSE 250 (regarded as a more accurate barometer of the health of UK industry as a whole) had erased its post-Brexit losses within just over a month from the vote and is currently close to its 2015 peak. 

Property-wise, the commercial sector felt the pinch. An estimated GBP18 billion of commercial property funds were suspended; the fear being that businesses would put their plans on hold in light of the vote. Between July and September we saw gradually decreasing declines in commercial asset values; yet October saw a slight rise, providing evidence that the downward trend is being reversed. 

The signs are that Brexit is already becoming the new normal. It’s a case of business as usual, and with the CBI arguing of a “major risk” of London’s economy being damaged by chronic housing undersupply, business as usual on the residential property front means addressing that supply gap. 

2. Demand and supply gap to increase  

The year up to June saw immigration to the UK reach 650,000, the highest level ever recorded. Pressure on the nation’s existing housing stock is increasing with few signs that this fundamental undersupply problem will be addressed in the near future. 

The Government’s stated aim is to build a million new homes by 2020 – which equates to 200,000 new units a year. According to the National Housing Federation, this is still around 50,000 fewer each year to keep pace with demand. What’s more, with only 142,890 units started last year, building levels remain significantly short of what’s required. 

The supply gap - one of the fundamental drivers of rising yields and capital growth - looks set to be as significant as ever in 2017 and beyond. 

 3. Continued strong rental yields 

It’s predicted that 2017 will be the first time since the 1930s that more UK residential properties are let than sold.  

The UK will continue to attract investors looking for yield as well as capital appreciation. Rising rental yields should also continue to have a knock-on effect on price growth. Government attempts to curb buy-to-let activity means that rental income from the existing rental stock is on the rise. This could drive further growth in the private rented sector, further constraining the supply of properties on the sales market, thereby driving up demand.  

4. Tightened restrictions on buy-to-let and on lending
(unless tenants are suffering) 

2017 will see the phasing in of the government’s tax change, announced in 2015, that will eventually remove landlords’ ability to deduct mortgage interest from rental income for tax purposes.  

Next year will also see the rollout of tighter affordability tests targeting buy-to-let landlords. Notably, buyers with four or more properties in their portfolio could have their entire portfolio assessed as part of the mortgage application.  

The reasoning behind both of these measures makes sense in our view; to help prevent a property bubble emerging. However, if the cumulative effect of all of this is to push up rents (thereby putting extra pressure on “Just About Managing” tenants), don’t be surprised to see a U-turn.  

5. Policymakers will focus on foreign property ownership  

Sadiq Khan

Earlier this year, London Mayor Sadiq Khan announced an enquiry into foreign ownership of property in the capital. So are things about to become more complicated for foreign investors? We will look out for any concrete announcements, but we consider it highly unlikely that London is about to be declared off-limits. 

The new mayor is a pragmatist. For one thing, in the aftermath of the EU referendum, he was first in line to stress that London remains very much “open for business”. Draconian restrictions would send out the wrong message at precisely the wrong time on this front.  

What’s more, when the enquiry was announced, Sadiq was careful to stress “the positive role that overseas buyers play in enabling developments to go ahead”. Quite simply, reduced foreign input means fewer projects - the exact opposite of what London wants and needs.  

6. More infrastructure spending means new investment opportunities 

The new Chancellor Philip Hammond has already indicated his willingness to do “whatever it takes” to deliver a smooth landing from Brexit. Big spending could be back on the table - especially when it comes to infrastructure. 

Just as IP Global has factored in the likely impact of HS2, Crossrail and the Northern Powerhouse initiative in its decision making, we await with interest any further announcements on big infrastructure projects - and the potential investment opportunities that flow from them.  

Our UK investment strategy in 2017 and beyond  

Outer London along with key regional hubs such as Manchester, Birmingham and Liverpool look set to be at the heart of our UK strategy for 2017. As ever, our analysts will keep a keen eye on the market; investigating potential new and emerging powerhouses and opportunities.


 

Hamish Pound

Written by Hamish Pound

Hamish is Head of Investment at IP Global and specialises in both developed and developing real estate markets following positions in the UK, New York and Thailand. As a consultant and analyst in his previous roles he has consulted on a number of new development projects across Southeast Asia.

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