What are the potential risks in property investment post-Brexit?
Immediately after the Brexit vote in June 2016, there was nothing but talk of a huge economic slump for the UK. It was feared the value of the pound would plummet, migrant workers would leave the country in droves, and that jobs and wages would be cut as big businesses moved their headquarters overseas.
Experts predicted the property market would experience zero or negative growth in the short term because, when there’s economic uncertainty, consumer confidence falls and people tend to batten down the hatches. That results in a drop in the number of properties coming to the market, a drop in the number of available buyers, and a general unwillingness amongst buyers to pay full asking price, in the fear that house values will fall.
The knock-on effect for landlords was feared to be threefold: a fall in the capital value of their investments, a drop in rental prices, and a loss of immigrant tenants. If all three were to hit the market at the same time, then landlords would almost certainly see their returns shrink.
But the real picture is currently nowhere near as bad as forecasters and the headlines suggested it would be. So how bad is it? Here, we’ll take a closer look at how Brexit might affect property investments, and whether this is cause for concern.
Potential threats and risks for investors
There are two main sources of risk for property investors post-Brexit: a drop in the value of the pound causing an economic downturn, and immigration changes resulting in migrant workers leaving the UK for good.
In regards to currency, looking at the figures, in mid-April the pound hit its highest level against the dollar since we voted to leave the EU. Before the vote, the exchange rate was around 1.5 dollars to the pound; by early 2017 it had dropped to just above 1.2, and by 17th April this year it was 1.43. At the same time, it hit an 11-month high of just above 1.15 euros to the pound and, with more than 6% gains since the beginning of 2018, the pound was the best-performing major currency — suggesting that the threat level here doesn’t seem to be very high.
What about the result of immigration changes? Well, a migrant worker exodus could be caused by both policy and persecution. Based on what was reported in the media, the Brexit vote itself brought about a distasteful rise in prejudice against immigrants, and an RLA survey at the end of last year revealed that one in five landlords were less likely to let to an EU national because of the ‘right to rent’ checks they now have to carry out. So it’s not surprising that a proportion of EU migrant workers decided to leave.
However, although the number leaving the UK has risen and the number arriving has fallen, there are still more EU citizens coming than going. While there isn’t yet any firm decision on what the rules will be once free movement ends in 2021, suggestions are that there will be an agreement with the EU for things to stay much as they are at the moment. And net migration as a whole was at nearly a quarter of a million — which, again, suggests that there seems to be little cause for panic about a drop in demand for housing.
The current state of the property market
It’s encouraging to see that the property market across England and Wales as a whole has proved resilient. While London, which has always had its own micro-market, has suffered from some significant price falls — particularly in the more expensive boroughs — most of the rest of the country is doing just fine.
In the 12 months to March, the average property value for England and Wales grew by 0.7%. This might seem pretty meagre, but if we take out London, where prices are still falling, and the South East, which is currently on 0% annual growth after several months of small falls, the rest of England and Wales actually grew by 2.6%. The good news then is, given that inflation was at 2.3% for the same period, according to the ONS, the average property investor should have gained on the equity front.
And, remember, those are just average figures. Some regions are doing better than others — notably the North West, South West, and Wales — and some local authority areas are performing brilliantly, seeing double-digit annual rises, so you may well have seen some very positive net capital growth.
The buy to let market has also been resilient. Average rents in England & Wales were up by 3.2% (seasonally adjusted) in the 12 months to March, with the average yield holding steady at 4.4%. It’s important to remember though that, Brexit aside, there’s still a significant shortfall in the supply of rented housing versus domestic demand.
Finally, the build to rent market continues to attract serious institutional investment from both UK and overseas companies, who are ever keen to tap into the growing trend for long-term renting and providing a much-needed housing solution, while the government is still falling short of its own house-building targets.
If capital values drop, then it’s something of a win-lose outlook for investors. On the one hand, the properties you already hold may fall in value, but on the other hand, if the property market slows it could be a great opportunity to add to your portfolio by striking discounted deals with people who need to sell. That might also mean a better average yield for landlords, as rents don’t tend to drop in the same way as capital values.
If you’re a landlord investor, then it’s important to make sure you’re not forced to sell in a bad market by making your property as attractive as possible to a broad spectrum of tenants. If you currently let to migrant workers, which is more likely if you have HMOs, look at how flexible you could be with your accommodation. Find out about the demand from other demographics and perhaps consider whether splitting the property into flats could be more profitable in the future.
As always with property investment, though, it’s about keeping a close eye on the demand and being flexible and creative about the investments you make to satisfy that demand. This can be a difficult process, though, and at Qandor, we provide a friendly, driven environment for professionals who want to learn and share knowledge of the industry. Specifically, in how to progress through it with integrity, and of how to remain profitable during bad times and flourish through the good.
If you’re keen to discover more property investment insights, just head over to our Advice page.