What to look out for when you invest in UK property this year.
Brexit has happened. How rosy — or bleak — is the outlook for the UK in 2020? As the UK braces itself for change, we take a look at several fundamentals: population, the economy, and the housing market.
The UK has had quite an eventful start to the year. Fresh out of a General Election that saw the Conservatives’ win by a clear majority in Dec 2019 (its second in 2.5 years!), the country finally saw Brexit “get done” once and for all — at least, somewhat**.
After three years of Brexit-related hubbub, the crossover from Brexit Day on 31 Jan to 1 Feb was, paradoxically, quite undramatic. Henceforth, what’s left is for the UK to chart new territories while transitioning out of the EU.
Between now and the end of the transition period on 31 Dec 2020, most things will remain status quo. Some uncertainty is expected as the UK starts to bash out trade, immigration and security matters with the EU and the rest of the world, but regardless of the outcome, the initial uncertainty is expected to settle and then it is business as usual.
A key milestone slated to occur in Q1 is the implementation of the 3% foreigner stamp duty surcharge — a huge leap from former PM Theresa May’s proposal of 1% — which is widely expected to be enforced on 11 March after the Budget announcement.
Until then, there is a window of opportunity for hefty savings before UK property becomes more expensive for foreign investors, with price hikes potentially rising to the tune of hundreds of thousands! Read our article for more information here.
As the UK braces itself for change, we take a look at several fundamentals: population, the economy, and the housing market.
UK OUTLOOK: ENGLAND & LONDON LEAD POPULATION GROWTH
Population growth translates to housing demand.
In 1998, nett migration became the main driver of the UK’s population growth, overtaking natural population change. Over the past year, international migration had remained steady with more than 200,000 entering the UK for long-term stay, while EU nett migration numbers, due to Brexit, expectedly saw a decline. In the next 10 years, nett migration growth is projected to increase the population by 3 million, giving rise to greater demand for housing.
According to latest data, England charted the fastest population growth, with an increase of 358,000 last year alone. London recorded the largest proportion of growth at a whopping 44% increase from 2013-2018 alone, and is home to 4 of the fastest-growing Local Authorities in the UK (see Figure 1 below):
London is not the only city to benefit from population growth. Urbanisation has caused other English cities to grow too. As a result, many cities have doubled in size since the 21st century, led by Liverpool, Manchester, Birmingham and Leeds. Investors would be wise to watch these cities.
UK OUTLOOK: POSITIVE ECONOMIC GROWTH RATE
Far from succumbing, the UK has instead snubbed its nose at the gloomiest of forecasts made ahead of the Brexit vote: joblessness is at its lowest level since the mid-1970s, while wage growth accelerated to the highest levels in a decade.
It is important to note that the UK economy has steadily maintained a positive growth rate over the years (Figure 2), led by a robust services sector. The year 2019 saw the growth rate slowing due (to greater extent) to Brexit-related uncertainties over the past 3 years, and partly due to weakened global growth (trade wars, protectionism, potential geopolitical risks, etc). Regardless, the projected growth rate for 2020 remains positive, albeit at a slower rate of 1%, before it is expected to improve further.
The approval of the second reading of a Bill to implement a Withdrawal Agreement between the UK and EU is expected to have positive knock-on effects on the economy. Brexit uncertainties that have been facing households, businesses and financial markets will presumably decline gradually, support confidence, and lead to a pickup in household and business spending.
That, and clarity in Brexit’s direction, have resulted in the appreciation of the Pound Sterling. The currency, which fell to its lowest in almost 30 years against the US dollar during the Brexit vote, is predicted to rise again, particularly as more certainty emerges (Figure 3). Thus, the window of opportunity to hedge against the currency and invest while the pound is weak, is narrowing.
Job growth and a conducive business environment are main drivers of population growth. These cities have been named in multiple reports and surveys as the top cities for business growth and employment (Figure 4):
UK OUTLOOK: HOUSING FORECAST
The medium-term outlook for the UK housing market is positive. JLL forecasts notable increases in house prices and transactions across all regions of the UK over the next 5 years, with regional house price growth outperformers including London and the Northwest (cities in the Northwest include Manchester and Liverpool).
Urbanisation will see towns and cities with the highest housing demand; after all, an additional 2.5 million people will be living in the UK’s urban areas by 2024.
Ultimately, housing undersupply will continue to underpin property prices as population growth adds to the skyrocketing demand for housing — a conundrum that has beleaguered the UK for decades. This has driven, to a great extent, a need for rental property.
At the close of 2019, UK’s city house price growth had hit a 2-year high, with affordability driving price growth forecasts for the Northern and Midlands cities.
Manchester, Liverpool, Birmingham, alongside Edinburgh and Nottingham are among the cities that have tracked a consistently positive price growth among the 20 lead cities in Zoopla’s House Price Index in 2019. The affordability of its housing, coupled with the growing economy, are the reasons that buy-to-let yields have been much higher than in London.
London, while stymied by overinflated prices and flat growth in the past 2 years, saw a rush in market activity late in 2019, triggered by the General Election. We continue to foresee more activity in the London housing market due to current affordability, although price growth will remain constrained.
Overall, London, Manchester, Liverpool and Birmingham remain the top cities for property investment opportunities and returns, as will Nottingham, Leceister, Glasgow and Leeds (Figure 5). High property prices and the era of shared economy will continue to boost property investment in these cities.
We foresee more activity going forward, given that there is now greater clarity regarding Brexit following the General Election in 2019. More investment is also expected especially from overseas investors rushing to beat the 3% foreigner stamp duty surcharge expected in March 2020.
Although Brexit Day has come and gone, Brexit isn’t really quite done yet. Uncertainty is expected as deals are negotiated between now and the end of the transition period in Dec 2020, but the storm will run its course and the outlook is far from bleak. Have questions? Want a more in-depth and in-person analysis on the UK property outlook? Join our UK Property Masterclass this 23 Feb at 2pm. Fill in the form below for more info.
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