London property: a foreign investor’s view

Brexit jitters continue to affect the UK property market with a significant dip in the value of the pound and domestic investors holding their breath. This has provided foreign investors and landlords with a golden opportunity, particularly those seeking property in Prime Central as well as Greater London. This month, I look at the opportunities and the considerations when investing in London property.

Investment and asset management firm Investec noted that there has been no shortage or slowing of foreign investors buying UK property. Favourable exchange rates, coupled with the promise of lower corporation tax (17%) and improved transport links with Greater London are all proving an attractive option.

European buyers are more hesitant with the pound still relatively strong against the euro and continuing Brexit negotiations – many are understandably playing the long game on Britain’s property market. Marc von Grundherr, Director, reports that he is seeing keen interest from Chinese and Middle Eastern buyers who are reaping the rewards of the low pound: “During my last trip around Asia and the Middle East in April, I met more clients refocusing their attention on London than the last three trips combined. The drop in sterling has clearly reignited interest in spite of the uncertainty with Brexit.”

Market Analyst at IG, Joshua Mahony comments:

“Looking at the property market from the perspective of the foreign exchange market, it is clear why so many people are choosing to put their money into the UK real estate despite the ongoing fears over what a Brexit could mean for the future. The final quarter of 2016 saw Foreign Direct Investment (FDI) reach a record high of £110,946m.

“Much of this will be associated with the impact the devaluation of the pound, yet it also highlights the fact that investors still see the UK as a worthy place to park their money for the long term. We have seen a huge devaluation of the pound in the wake of the EU referendum, yet with GBPUSD falling to a new 31-year low in Q4, it is clear that the pound is undervalued by historical standards.

“The pound is likely to be substantially stronger in five years’ time, so there is a clear attraction to investing in a traditionally reliable and stable property market which has the potential to see huge gains just based on FX considerations alone.”

Mahony’s point is important, regardless of currency fluctuations, property has traditionally been viewed as a safe investment (especially rental property because of the continued low supply and high demand) so it makes sense for foreign investors to buy while the ‘price’ is low.

Exchange rate

So just what are the “FX considerations” Mahony mentions? At the time of writing £1 is worth €1.19 and US$1.29; six months earlier £1 had been worth €1.42 and US$1.58. So even with the new tax thresholds and mortgage loan to value criteria the UK government has introduced on buy-to-let properties, foreign investors are still getting a good deal.

Investec calculates that this difference in the pound’s value accounts for significant savings. For example, moving £1m to the UK for a property investment on the 23rd March 2017 would cost $250,000 less than on the 22nd June 2016, and $450,000 less than 1st July 2014.

In addition, the average price of a house in London has dipped to £485,660 from November 2015’s record high of £528,340, with the average London-wide rent for property in London April 2017, estimated at £2,180 per month (source Benham & Reeves ). Taking all these factors into consideration, it is no wonder that foreign investors are expressing a keen interest.

Peter Izard, Business Development Manager for Investec comments:

“The fundamentals of the London property market will continue to ensure a strong demand from international buyers. Offering a stable political system, strong and safe legal title and long term asset appreciation, London will continue to maintain its highly regarded market choice for worldwide investors. Additional factors include its favourable time zone and excellent educational facilities and transparent tax structures.”

Casting the net wider

Prime Central locations have always been attractive investments, but recently Greater London has upped its game. New developments in ‘cheaper’ travel zones allow foreign investors to purchase multiple units at once, at a cost that is considerably less than for Prime Central London.

These outer areas have always suffered from the perception that they are poorly connected but new transport links such as the cross rail or the extension of the Northern Line (to serve the Nine Elms and Battersea Power Station developments) are challenging that view. In just two years, the transport improvements will make the areas more appealing to those who need to commute daily to central London for work, as a consequence, the demand and the rental value here is likely to rise. The current average rental is £2,236 (source Benham & Reeves Estate Agents ) and it’s not inconceivable that this will rise to be more in line with central London figures of £3,033 pcm (source Benham & Reeves Estate Agents ).

UK investors

Much has been made of Britain’s exit from Europe and that has undoubtedly cooled European interest in the UK property market. Yet the UK investor’s interest in the European property market is just as strong as ever. Second homes, in France and Spain mainly, promise romantic notions of holiday or retirement destinations and, if needed, can offer the potential of a rental income. A word of caution however. It is vital to take independent advice from an English-speaking solicitor who is not connected to the seller, estate agent or property developer before considering a purchase. It might even be a good idea to release funds from a UK property by remortgaging to make a cash purchase rather than suffer the exchange rate fluctuations of monthly mortgage repayments.

Special FX

Exchange rates can have a huge impact on monthly mortgage outgoings so foreign investors, from Europe or further afield, are understandably making the most of the Brexit uncertainty.

As Richard Perry, Market Analyst at Hantec Markets notes: “The decision for the UK to leave the EU has clearly had a significant impact on the affordability of London property for overseas investors. The value of sterling for dollar investors fell from $1.50 to just above $1.20 in the months following the Brexit vote, a decline of 20% in the value of sterling. There had been suggestions of a dramatic impact on the housing market in the event of Brexit, both higher and lower depending upon your sources. However, asking prices have changed very little in the year on year trackers from 2016 to 2017. Even though sterling has now recovered towards $1.30 against the US dollar, this suggests that with sterling still 13% cheaper in dollar terms. This gives foreign investors a significant “Brexit discount” on their purchase and should help to sustain demand.

Of course, as with all financial investments, experienced foreign investors will have a clear strategy in place.  Toni Rami, COO and Co-founder at Kantox comments:

“After having lost 20% of its value against the euro and nearly 15% against the dollar in 2016, investing in the UK is now much more attractive than it was in 2015. That said, it is far from a safe bet. With the upcoming Brexit negotiations, we are likely to see sharp spikes in volatility in the short term as the talks develop. In the longer run, the UK’s post-Brexit deal will strongly determine the value of the pound.

“In this context, foreign investors should be aware that currency risk will play a major factor in their investments. Additionally, they should have a rational strategy in place, in line with their investment horizons, to react to FX-market movements. This way, investors can benefit from a good entry point and not have their positions suffer because of currency movements.”

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Currency value, a dip in property prices and continuing high rental demand in London mean that regardless of the Brexit and general election outcome, buy-to-lets remain a good investment.

Data sources:

3: https://www.itv.com/news/london/2014-07-15/the-rise-and-rise-of-london-house-prices-1986-to-2014/

4: https://www.gov.uk/government/news/uk-house-price-index-hpi-for-january-2017

5: https://www.cchpr.landecon.cam.ac.uk/Projects/Start-Year/2007/Comparative-analysis-of-private-and-social-sectors-rates-of-return/Rents-rates-of-return-1998-99-to-2006-07/PRS-Report

6: https://homelet.co.uk/homelet-rental-index/london