The Brexit Effect on Real Estate Investments MILLWOOD KANE INTERNATIONAL
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NISH BHATT - CEO OUTLOOK ON LONDON PROPERTY

Brexit uncertainty and tax increases are all combining to make buyers nervous about British real estate, but fundamentally, is anything broken?
 

Let’s put things into perspective. Some of the fundamentals that a country’s economic fortunes are judged on are: trade, employment and wages, population and supply of housing. Taking a closer look at these and other indicators helps to understand where the property market is heading.

Trade

Ultimately, the future trade arrangement with the European Union will not look the same as it is now, however we all buy goods and services from all over the world, we trade with China, India, US and Europe. Trading goods such as the import of Japanese and German cars will continue, as well as the export of UK produced items. The same applies for the services industry and the financial industry too. Despite the jitters, UK trade is looking very promising and the UK will be able not only to trade with the European Union but the rest of the world. The extent of trade with the EU will depend on the nature of UK’s withdrawal.

In April this year, HSBC said that the value of British exports will increase at a faster pace since 2011, with the weaker pound boosting British exports. Goods and services exports is expected increase by 10 per cent to hit $900bn by the end of the year.

The likelihood of the pound surging significantly is remote. This will continue to provide support for the export trade. As mentioned earlier, although the future trade relationship with the European trading block may not be the same as it is today, trade will continue as it does with other countries outside the EU. The US, India and other commonwealth countries have shown strong interest in future mutually beneficial trade agreements. The forecast suggests that India

will be the fastest-growing importer of British goods, followed by the United Arab Emirates along with Vietnam and Indonesia. HSBC says under the forecast, China will be the fourth- biggest importer of British goods. Unshackled from EU constraints, the potential for the UK to trade with the rest of the world will unfold. This trade will support expansion in the general economy and support the real estate market.

Employment and wages

The United Kingdom is in full employment. In August, the unemployment rate stood at a mere 4%. Unemployment rate has fallen to its lowest level in more than 40 years and wage rises are now at the highest level since the financial crisis. From next April, the national minimum wage will increase by 4.9%, from £7.83 to £8.21 an hour. The living wage which is a voluntary wage for Londoners is over £10.50 per hour.

In June 2018, Minister for Employment, Alok Sharma said, "The employment rate has never been higher, with more people in work than ever before, and with a continued fall in unemployment, we have a strong jobs market that set 17 new employment rate records since 2010."

In the budget on the 29th of October 2018, Chancellor Philip Hammond announced key indicators that will keep the property market and the general economy propped up. The personal allowance threshold- being the rate at which people start paying income tax at 20% will rise from £11,850 to £12,500 in April, a year earlier than planned. The higher rate income tax threshold, the point at which people start paying tax at 40%, will also rise from £46,350 to £50,000 in April. In the future, the two rates will rise in line with inflation. With more money in the pockets of all people the general economy is set to grow again supporting the Real Estate Industry.

Population

We are experiencing an aging population (over 60s). According to the UK government office for Science, the increase in life expectancy and the upward average age seen during the 20th century is projected to continue. More than 70% of UK population growth between 2014 and 2039 will be in the over 60s age group, an expected increase from 14.9 to 21.9 million people. That is a shift of 7 million people entering the boundary over the age of 60 in a period of 25 years. Within the same 25-year period, the new population within the UK is set to increase by 9.7 million.

The ageing population of the UK is set to increase substantially and with the birth rate increasing only marginally, the number of people living longer will increase sharply. The expected drop in the supply of UK working-age population will have to be covered by highly- skilled immigration. London being the tech capital of Europe will keep attracting talent from abroad to add to its already highly-skilled local talent force, sustaining the demand for properties.

In addition, the property life cycle is expanding due to the increase in life expectancy, and private properties that are being occupied for a longer time are not coming back into the system for a prolonged period. The ‘immunity’ of foreign companies, such as Google, to Brexit and their desire to locate where the talent is, further explains the rise in scarcity for residential as well as office space in London.

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The chart shows, vacancy rates for office properties in London. The falling vacancy rate is an indication of better conditions for business, as companies have confidence in expanding and upgrading. The London market is witnessing numerous new business entries.

 

Supply of Housing

The smart developers tend to land bank for up to 10 years of supply, but once the land has been developed, they have to sell the developments as soon as possible. Generally, a 3to 5-year period is applied, depending on the size of the project. When recession hits the market, the rate of development goes down. Developers do not have the luxury to hold onto depreciating assets. In these circumstances supply decreases, however, the investors have a different mindset.

Except for speculative investors, most investors have a longer period profile on their investment strategy and as such are more geared towards yields in the short term, with sustainable growth in asset values over a prolonged time frame of 10 years or more.

Currently, most developers are cautious. Crest Nicholson and Berkeley homes for example, are slowing down the rate of development to manage the short-term risk of Brexit. This will continue to exacerbate the shortage of housing and will keep interest in the property market both from owners-occupiers and investors alike. Additionally, the chancellor added an incentive to get the market moving for all first-time buyers. Purchases of shared equity homes of up to £500,000 are to be exempt from stamp duty.Further to this, are low interest rates and more choice in the mortgage market, as well as schemes such as Help to Buy,all adding support for the property market.

A recent research carried out by UK Finance, which represents mortgage lenders, said the number of first-time buyers had reached its highest level since June 2017. Some £6.1bn was lent to these buyers in August, equating to 5.2 per cent more than in the same month last year. They expect the current trend of first-time buyer growth to continue into 2019, with the balance of the market maintaining its importance. This will also support the property market.

 

Mortgage rates could stay low for longer

A silver lining for homeowners is that your mortgage rate could stay low for a while, should no deal be agreed. Despite the increase in base rates in August, the cost of borrowing has remained highly competitive as the market has slowed and lenders have fallen deeper into a Brexit mortgage war. A senior lending industry commentator Ray Boulger explains; “Due to the short-term impact of Brexiton the economy being negative, the Bank of England is more likely to cut rates in combination with other measures in order to stimulate the economy”. He adds, “the fundamentals that have driven house price growth remain the same though, namely the limited supply of property and low interest rates."

 

Notable companies that are moving into London despite Brexit

The new Facebook headquarters and Google’s plan to increase capacity in London is strong support for the capital’s property market. Last year Facebook announced that they intended to lease a minimum of 400,000 sq. feet at the King’s Cross Central development, which is also where Google’s parent Alphabet is developing its new headquarters. In the same area, Google is planning its new 92,000 sq. meter, 11-story London headquarters, which will stretch parallel to the platforms of King’s Cross railway station and house 7,000 employees. The development site stands at 24 hectares making it Europe’s largest urban regeneration project. Despite the post-Brexit fear, Google’s executive officer reassured that the UK economy’s strength went “far beyond” the democratic vote’s result; it may have complicated “secondary effects”, he stated, but not enough to halt the company’s growth plan.

In the third quarter of 2018, take-up of office space in Central London reached 3.4 million sq. ft– well above the 10-year average of 3.1 million sq. ft, according to CBRE. The total take-up in the year to date has reached 9.8 million sq. ft, which is higher than the 2 preceding years. Emma Crawford, London leasing managing director at CBRE, said: “Q3 saw a resilient performance across the London office market, with requirements for space from the banking and finance sector proving exceptionally strong.” The continuing trend is occupiers’ preference for new space across the quarter, with new or pre-let space representing nearly half of all take-up, taking it significantly above the 10-year average.

Following Apple’s massive investment in London’s soon-to-be-revived iconic Battersea Power Station, London is continuing to attract property investment. Driven by the Facebook deal, the creative industries represented the largest proportion of take-up in Q3 at 41%, followed by business services (23%) and banking and finance (20%). Business services take-up was led by acquisitions by flexible office operators, the largest of which saw WeWorkacquire 52,300 sq. ft at 1 Waterhouse Square, EC1.

There is an annual increase of 21% for properties under offer and significantly higher than the 10-year average of 2.9 million sq. ft. The largest unit under offer at the end of Q3 was at 5 Merchant Square, where 159,200 sq. ft of space is under offer to a confidential occupier on a sublet from Marks & Spencer. This frenetic activity requires housing to support new migration into London. This immigration could be from the rest of the UK, the EU and the balance of the world.

 

Conclusion

Despite Brexit, all the indicators show that London is still the fin-tech capital of Europe, whilst banking and finance are also showing growth. This flies in the face of pundits suggesting that the financial services industry will become fragmented across Europe moving forward. It also highlights the ongoing attractiveness of its commercial property industry in a post-Brexit world. Brexit uncertainty is clearly failing to dampen investment appetite. Mark Parkinson, head of London at property search consultancy at Middleton Advisors answers the question of how often the property market in the UK had fallen three full years in succession. He said, "Even in the wake of the near-collapse of the worldwide banking system in 2008, and a fall of up to 24 per cent in Prime Central London, the property market had recovered to pre-2008 levels by mid-2011".

It is my opinion that while nerves continue to be tested, the environment of low interest rates, knee-jerk reactions of some property owners settling at lower prices, and favourable exchange rates for foreign investors, meansLondon will be offering incredible opportunities in the coming months and years.

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