As the fall-out from the EU referendum takes hold, one outcome has become apparent – we have entered a period of uncertainty as the market attempts to establish the impact of this decision. Whilst investors are often nervous when it comes to the issue of uncertainty, the situation does present a number of opportunities.
Investor sentiment continues to be mixed, with some investors cautious in their outlook and others taking a more positive stance. We have seen a number of overseas investors entering the market, particularly those based in North America, Asia and Europe, viewing the devalued pound as a significant opportunity. To put this in context, since the result of the vote the pound has devalued against the US dollar, Euro and several Asian currencies by broadly 15%.
Based on this fundamental change, some overseas investors now consider residential investments in the UK as looking cheap in historical terms, leading to an increase in capital from these international markets. This has been particularly noticeable in Central London. The chart below illustrates the impact of recent movements in the UK pound on effective pricing for investors based in other currencies.
Annual Change in PCL residential prices by currency – (12 months to August 2016)
In reality a more structural market adjustment had already taken place prior to the EU Referendum, in respect of the changes to stamp duty in the last budget. The new regime applies to the acquisition of a second residential property or the purchase of 2 or more units. On this basis an additional 3% stamp duty, on top of the prevailing rate is now payable. To put this in context it means for a block of 5 flats priced at £2 million the stamp duty payable has increased from £68,750 previously payable, to £110,000 based on the new rates.
However, assets comprising 6 or more units may be taxed at the commercial rate of 5%, rather than the residential rate. This has led to investors considering a quantum of units in excess of this level, in locations where prices are higher than this threshold. In particular, this has been a significant factor in the Prime Central London market, where assets have been most exposed to this change, due to the relatively high prices in this market.
Although the alterations in market conditions from both stamp duty and the referendum result would typically be expected to translate into an adjustment in pricing and increased opportunities, this has been held back by the lack of necessity to sell. The historically low interest rate levels, combined with a limitation of opportunities to deploy capital into other assets has meant transaction volumes have remained low.
One area where we see opportunity in the short term is in respect of new build stock, particularly for schemes approaching practical completion. The impact of the above changes may lead to developers looking favourably on large scale bulk deals, to assist in sales flow and de-risk developments. This is an area where we see good short term prospects for investors.
In the long term residential investment assets continue to represent a desirable investment opportunity. The dynamics of demand and supply in the housing market, particularly in London, presents the positive market conditions to foster growth. In particular, the rental sector is anticipated to continue to grow significantly in coming years. In addition to the hurdles faced by young people trying to climb onto the property ladder, there is also a desire for the flexibility offered by rented accommodation, especially among young professionals.