Time to invest in UK real estate?

The UK housing market has felt the brunt of Brexit with house price growth remaining weak despite resilient output growth and aggregate demand. This had led many investors to question their exposure to UK real estate.

Recent data suggests a turn in fortunes for UK real estate. Both Nationwide and Rightmove reported modest house price growth in May at 0.6% and 0.1% respectively, while the Royal Institution of Chartered Surveyors UK Residential Market Survey was better than expected. The survey highlighted that the Brexit deadline extension to October 2019 helped ease pressure in the UK’s housing market.

Nonetheless, the market on aggregate is weak despite mortgage providers as a whole responding to Brexit by keeping mortgage rates (the rate they lend at) marginally above swap rates (the rate they borrow at) in order to entice demand.

Regional opportunities

Whilst many question the attractiveness of investing in UK real estate, further analysis shows that segmentation in the market provides opportunities which differ depending on firstly where you buy and secondly your time horizon for purchase.

House prices in specific regions outside of southern England have been encouraging and notably above their ten-year averages. However, the two regions which have been underperformers are those with the highest weighting (London and the south-east). London is the only region where the annual year-on-year average growth rate is negative.

Tighter regulations

In the aftermath of the financial crisis, the Bank of England (BOE) and the Financial Conduct Authority (FCA) were keen not to accommodate a housing bubble, so introduced a broad range of regulatory changes, following a comprehensive mortgage market review in 2014. This represented the largest changes to mortgage regulations in a decade, with all UK lenders reviewing their approach to UK mortgage lending.

From 1 April 2016, anyone buying a property in addition to their own home had to pay a higher rate in stamp duty, resulting in a spike, then a drop in transactions.

To a certain extent, buy-to-let transaction levels have remained lower than pre-2016 transaction levels. Further tax changes have made a buy-to-let property less attractive.

Implications for investors

Despite these challenges, the market remains competitive. Long-term funding rates are low and margins have been compressed, resulting in increased growth opportunities, particularly within commercial real estate.

Investors from Asia and the US are benefitting from currency favourability but contrary to popular belief, the UK housing market still offers opportunities for investors with a detailed understanding of market nuances.

Investors with the capital and the luxury of a long-time horizon are likely to generate returns from investing in London where it is likely returns will eventually mean revert. However, shorter to medium-term investors could target those regions where affordability constraints are less of a concern and property prices are growing.

Overall the outlook is positive. Taking into account property prices, currency favourability and low borrowing rates, foreign investors are looking at a 20-30% discount in the market since June 2016.

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