Following the vote to leave the European Union, British commercial and residential property prices fell in the panic, but have in recent months stabilized and begun to rise according to the Royal institute of Chartered Surveyors (RICS).
The number of potential purchases turned positive for the first time since February at the same time the number of properties coming to market fell for a 7th consecutive month. The post Brexit fall out seems to have settled down, and investors it would appear, are looking again at fundamentals.
Halifax also announced this week that house prices had actually only fallen marginally in the last three months since the vote. Even nervousness over Brexit didn’t dent the upward trajectory of house prices: annual growth increased to 5.6pc in August from 5.2pc in July.
But the key fundamentals still remain, a shortage of housing, high employment and a record low interest rate which is unlikely to change even with a forecast pick up in much needed inflation in the United Kingdom.
Foreign investors have the additional advantage of the fall in sterling. Whilst housing prices have fallen slightly, the 20% fall in Sterling (against the $) has increased the attractiveness of UK property to international investors whilst at the same time completely offsetting the recent rises in taxes which many are urging to be reversed.
For astute international buyers, UK commercial and residential property is attractive again. Apple seems to have taken the lead by signing up for a 500,000 square feet new office in Battersea power station.
The fundamentals remain the same:
- The UK is facing a shortfall of 1.8 million rental properties. PwC research suggests that by 2025, 7.2 million households would be in rented accommodation compared to 5.4 million in 2015 and 2.3 million in 2001.
- The House of Lords said in July that the UK should be constructing 300,000 new houses a year, which is 50% more than the government’s 200,000 target. But even this belies the fact that the supply of housing in the UK falls further and further behind demand every year. The government’s target of around 200,000 new homes annually until 2020 appears to be unrealistic, since output over the past 20 years has been around 150,000 annually. Despite the government’s targets, in 2015, a total of 166,900 houses were started in the United Kingdom, an increase of only 3.8% from the previous year.
- Planning regulations are difficult and many Local Councils simply do not want construction in their area.
- The number of properties being put on the market has declined continuously over the past 2 years. The average estate agent has just 45 properties on their books in September, which is close to historic lows.
- The government is supporting the lower end of the market with Help to Buy Equity loan.
- Interest rates are all time lows.
- Immigration levels at all time highs and unlikely to change even with Brexit.
- Natural domestic UK demand (although it is getting tougher as valuations and affordability declines for the young).
The priorities for international buyers remains – personal safety, a forgiving political and physical climate, English as the main language, good IT sector, handy time zone, flourishing arts, lush parkland and excellent global connections combined with the rule of law, a favorable tax regime, good schools and the great British tradition of political and economic stability. Compare that with the on the ground reality of political, financial and social restrictions in other countries, the worst recession for decades for others and sinking commodity prices forcing once highly liquid countries into cutting government expenditure, (Higher) taxation and bond issuance. None of these countries offer the institutional and social diversity and therefore the safety and stability for the individual and his family as the United Kingdom does.
RICS suggests that the long-term outlook inevitably involves severe housing shortages and increasing house prices.
Overall this is bullish for UK property as an asset class. When you combine it with the fact that the UK government has been forced to spring into action to change the structure of the economy away from its emphasis on banking and ancillary industries and relying on London and the South East as the workhouse of the United Kingdom it bodes well for UK house prices as a whole and makes now an interesting opportunity to invest not just in London but in other areas of the United Kingdom that exhibit better value on traditional metrics.
In our next blog post we will look at an undervalued British Asset that looks set to shine.