Foreign Direct Investment in UK Property Market Stays Strong Despite Brexit
Initial fears that Brexit would lead to an environment of political and economic uncertainty damaging to the wider economy and property market have so far proven unfounded. The slight slowdown seen in house price growth in 2017, particularly in London and more expensive areas of the South-East was expected pre-Brexit against the backdrop of the strong growth over the previous several years. However, there is little evidence of any more significant malaise beyond the inevitable slowing of price growth to levels which are more sustainable long-term.
Domestic demand for residential property remains healthy, along with the wider economy. Foreign Direct Investment levels in the UK, a significant percentage of which comes in the form of capital inflow into the property market, have in fact soared, reaching their highest level since 2005. Data from leading Chinese property investment portal Juwai.com also indicated that over the past year Chinese investment in UK-based residential property has leapt 60%. The evidence suggests that despite the inevitable period of turbulence the Brexit process will bring, long term analysis of the UK’s property market remains optimistic. The drop in the value of the pound over the past year has combined with this long term positive outlook to encourage foreign investors to up their interest in UK-based property investment.
FDI Value Soars
Over the course of 2016, dominated by the lead up to Brexit and several months after the vote had been announced, the UK saw FDI capital inflows hit £197 billion, £33 billion more than in 2015. The total value of foreign capital investments, measured by physical investments and not ownership stakes acquired in companies, was more than over any calendar year since 2005. FDI into the UK was also far higher than any other EU member state and accounted for the bulk of the overall 17% FDI growth into the EU. The UK attracted more FDI than any of the other 35 ‘rich’ member countries of the OECD (Organisation for Economic Co-operation and Development), also the source of the data, excepting the far larger USA.
While a small number of mega corporate takeovers swelled the numbers last year, the UK still attracted more capital investment than any other European nation after those are removed from the statistics. Maria Borga, a senior statistician at the OECD’s investment division, believes the foreign investment appetite is the result of the aforementioned dovetailing of a fall in the value of the pound with long term ‘confidence in the economy’.
UK Property Investment Confidence
The healthy FDI macro-picture is further reflected by continued, and growing, interest from abroad in the UK property market. A cheaper pound, faith in the stability and strength of the UK’s economy and political environment going forward and continuing low interest rates. As already mentioned, Juwai.com has seen enquiries from Chinese investors interested in UK property investments rise 60% over the past 12 months.
A recent article on the business section of the BBC’s news portal also detailed continuing enthusiasm in UK property from the growing Asian middle class. The article goes on to extrapolate that with two thirds of the global middle class expected to be from Asia by 2030 they will be one of the biggest drivers of international real estate markets in coming years, including the UK.
“As Asia’s middle classes get richer and more aspirational, that appetite is only likely to grow”. – Karishma Vaswani, Asia business correspondent for the BBC.
The Role of a Weaker Pound and Low Interest Rates
One of the key maxims of a successful investment strategy is buying when the market is low and riding it on the way back up. While growth in residential property prices in the UK are slowing they are still going up in many areas. Prices have only eased slightly in a relatively small selection of locals, particularly the more exclusive areas of London.
However, the circa. 20% drop in the value of the pound against other major international currencies since Brexit means that in terms of real cost to foreign buyers, when converting their currency into pounds, UK property is significantly cheaper than it was a year ago. This reduces both the entry level cost and adds currency gains into the mix of potential areas of profit. Even if property prices freeze or drop, this could be offset and a profit realised on sale if the pound strengthens again in the future. If prices grow some more and capital gains are achieved, this leads to additional profit potential. In the worst-case scenario, it spreads risk between currency dynamics and housing prices.
Diversifying risk between investment classes has been demonstrated by numerous studies as the most effective way of either increasing returns while maintaining the same level of risk or maintaining return levels at reduced risk. Together with low interest rates, which will still be very low against historical norms even if the Bank of England raises rates by 0.25% this year, for buyers who wish to access a mortgage, this has made UK property currently an extremely interesting proposition for foreign investors.
What About UK-Based Investors?
Of course, UK-based investors don’t have the added bonus of currency dynamics to take advantage of when it comes to property investment in the UK, unless they hold assets in other currencies which could be cashed in and invested back in the UK. However, any period of uncertainty provides unique opportunities. The most successful investors tend to be those that are busy looking for them while the rest are sitting on their hands and waiting for more ‘certainty’ to return to market sentiment.
The current Brexit uncertainty may well mean less competition for great property investment opportunities that come to market, allowing for better prices to be achieved. Investing in property while Brexit nerves filter through the market may well be the best opportunity for years to come.