A
commentary from Rick Nicholls, Managing Director, Bastien Jack Group Ltd,
UK property developer.
In short, we have opportunity.
Initial shock at the prospect of
leaving the EU sent the markets into decline, but have they not reacted pretty
much as anticipated? Never letting a crisis go without opportunity, selling
high to force a low, and then buy back? Since then there has been some
indication stability is returning to the markets though GBP to USD and Euro are
still trading lower. This is a good
thing for UK exports, making them more competitive, assisting those companies
that rely on export markets to grow. The UK vote for
Brexit probably doesn't mean that the housing market in the UK is about
collapse either. While some uncertainty in the short term may reduce house
price growth, for the longer-term property investor, this could be a good
opportunity for investing.
The foreign property investor has
a boost in value-for-money
In the 24 hours after the Brexit
vote, the value of sterling fell on foreign exchange markets. Not by as much as
predicted but by around 6% against the euro and 8% against the dollar. As I'm
writing this, the pound is now worth €1.11. This fall means the European
property investor has more sterling to spend.
Demand for property, specifically
in London from foreign investors is still likely to increase, interest has
been high from China and Asia as their currency exchange has automatically
allowed them a discount on current prices. This though is likely to bea short
window of opportunity as we see markets recover from the initial shock.
Domestic demand will remain
strong
Demand from home buyers and
renters probably won't collapse either.
There is concern that demand for
housing will fall in London and the UK. However, parliamentary research
produced for the 2015 Parliament put demand at between 232,000 to 300,000 new housing
units per year through
to 2020. Demand for new homes is exceeding
supply by around 150,000 every year. This demand, fed by the number of new
households created each year, is unlikely to fall below the level of supply.
Immigration will probably remain
strong
One of the main negotiations the
UK and EU will have to discuss is the free movement of people. Despite the
‘Leave' campaign suggesting a limit to immigration, we now understand there
needs to be movement but objective negotiations will have take place. This will
form a significant part of the negotiations to leave the EU.
Outside the EU, the Prime
Minister's current visit to India has the subject of immigration firmly on the
agenda for a post Brexit trade deal.
Fundamentals of the UK Property
Market
The uncertainty of the exact
outcome of Brexit may cause the property investor a little nervousness, but the
fundamentals for UK property remain strong.
In terms of capital growth, there
are a number of comparable data choices but the Real House price tracker
provides more meaningful guide to house prices and has been adjusted for the
effects of inflation over the same period. Results confirm the increases in
house prices have risen faster than inflation, and includes the last recession
where the fall can be seen as a correction when compared to the overall
property performance.
There has been widespread comment
as to the likely effects on house prices, with falls of between 5% and 10% for
areas outside London, though little evidence can be found to support this so
far.
The BTL investor has also seen
positive movements since 2001 with the size of private renters beginning to
grow again.
Annual rent rises too have
accelerated in recent years and these are not limited to London. Bristol and
Brighton both enjoyed increases, averaging circa 18% in 2015 compared to the
previous year. The insurer Homelet reported similar rises in the North (Newcastle
upon Tyne and Edinburgh) with around 16% over the previous year. Ultimately the
increases are attributable to what's happening in their specific area and will
be influenced by strong fundamentals. Perhaps Hull can expect some positive
growth when it is crowned City of Culture?
Rents in London have continued to
rise with greater pace than other areas in the UK but have slowed since 2014,
therefore a narrowing of the rent inflation gap between London and the rest of
the UK.
Even with the recent policy change
for buy-to-let investors paying additional stamp duty, more people have turned
to BTL investments perhaps as an alternative to low interest rates, bolstered
with the knowledge the pace of house building has not kept up with demand
therefore sustaining their investment. At the time of the referendum
result, there was speculation the base rate would reduce from 0.5% to 0.25%
which did take place in August. The Bank of England indicated they would
consider reducing further if the economy worsened, which so far has not been
the case. It was also confirmed at the time, they also would add
money to support confidence and restrict banks freezing liquidity, if not this
would probably cause a further credit crunch and restrict mortgage finance. The
governor of the Bank of England, Mark Carney, confirmed the reserve of
£250bn can be made available if required.
Carney further commented the
substantial capital held and large liquidity gives banks the flexibility to
continue to lend to businesses and individuals even during challenging times.
This suggests provision and safeguards are in place to maintain current lending
to suit demand.
Since the referendum, the markets
have rallied well and only recently fallen as investors are perhaps concerned
that central banks around the globe are easing up on the monetary policies
given the uncertainty of the US election result.
In the UK, mortgage approvals by
the main banks increased in September after a 19-month low in August. They were
lower than the year before but speaking with our local agents, they suggest
it's down to a lack of supply of new build property rather than purchasing
confidence.
There are four main areas for
focus as we get to grips with the prospect of the UK outside the EU.
1) Calm - we have
some indication this is already with us; the markets do seem to have calmed. This is probably due to all the positions the markets took on
‘Remain' have now well and truly played out. It's not over yet though, the
volatility is set to continue until Article 50 has been triggered and a new
directional plan from the government for the UK to leave is known.
2) Change - Nothing
ever stays the same, what works for today may not be right for tomorrow. A
pertinent example is Kodak, they tried to ignore new technology hoping it would
go away by itself on the basis of it being too expensive, too slow, too
complicated etc. It wasn't and their market changed irreversibly in a
relatively short period of time, moving from wet
film to digital technology.
3) Opportunity - Leaving
the EU does provide opportunity. With price correction, there is opportunity to
procure better land deals than prior to the referendum, as there may be fewer
developers with available funding. Contractors had full order books and build
costs had become very high prior to the referendum. We are aware some
development contracts have been cancelled as a result of Brexit. Therefore,
there might be more opportunity to reduce build costs as price elasticity plays
out. The current volatility will ease. The fact the UK has to build more houses to meet demand won't change.
Bastien Jack
Group Ltd has a strong project pipeline and
always procures sites which have strong fundamentals and in areas where people
want to live. There is a huge amount of due diligence which goes into every
site appraisal including courting many local agents and advisors to confirm
local demand and Gross Development Values. Speaking with agents in our pipeline
areas, they have confirmed confidence is still strong and enthusiastic house
viewings are still going ahead. As long as lending is still being offered and
liquidity remains within the economy, there remains a great opportunity for us
to progress.
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