UK property has long been a sought after investment regardless of whether you live in the UK or elsewhere. In 2014, London property was the most expensive per square foot beating out places like Hong Kong and Tokyo as the global financial crisis bit and investors burnt by shares and other financial assets plumped for bricks and mortar, the London property market accelerated. The rest of the UK also saw investment, this was not just a London story, but no area saw quite the gains than those seen in the UK’s capital city
Brexit may have changed this for now, much like many things to do with the UK’s decision to leave the European Union there is a huge amount of investment uncertainty but what is the outlook for property moving forward in this post-Brexit world?
Weakness in places
Certainly, as it stands at the moment, we have seen a slight correction in values since Brexit. Taking into account income derived from these investments both retail and office property are down around 1% on the year with industrial properties yielding about 2% YTD.
That is not to say that all sectors have been adversely affected; index linked investments i.e. those that appreciated in line with and therefore compensate for inflation have risen as have properties that allow investors to benefit from long-term letting income. Short-term lets have not fared well as lower economic growth expectations have heightened the chances of greater gaps between tenancies.
Indeed, property performance is very closely correlated with economic growth and as the UK economy goes so will property valuations. We therefore have to surmise that the outlook for UK property is one in which value can be found by investors looking for income and less concerned about short term capital growth. In an environment within which we are seeing low growth as well low interest and gilt rates the income stream from property will remain attractive. Foreign buyers of UK property are more than likely going to be able to take advantage of low interest rates in their respective countries and the devaluation of the pound to enable them a decent entry point into the market. UK banks have reined in their lending for property.
Commercial property demands are changing
In these markets it therefore stands to reason that uniformity in returns is not likely and investors looking at commercial property would be minded to take into account just what the average business wants now. More businesses are heading online and therefore diminishing their High St and Out of Town footprint in favour of a warehouse and fulfilment by couriers. Start-ups want to work with each other in ‘incubators’ or co-working spaces as opposed to office blocks. Certain office configurations such as clusters of technology and developer landscapes benefit from significant tax relief for both owner and tenant.
Taxes have hurt prime residential investments
In residential property the story is broadly similar although in London demand has fallen off a cliff following an increase in stamp duty on propertied valued over £1m. Transaction volumes are down 23% in the 9n months to October compared to the same period in 2015 and that has contributed to a 10.4% fall in prices since their peak in 2014. Uncertainty will delay the return of price growth but the market will be underpinned by low interest rates and the value of sterling.
Supply dynamics have shifted from shortage to oversupply in the past few years and the development pipeline is large: pre‐referendum Savills expected 39,000 prime units would be delivered between 2016 and 2020 with just 5% of that considered “super prime”. Around 23% of the pipeline is under construction and post‐referendum these units are expected to be delivered over a longer time period – lowering the risk of continual oversupply.
An Englishman’s home is his castle the saying goes and there are many castles available for both Brits and foreign buyers to make theirs or someone else’s home.
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