The result of the Brexit vote sent shockwaves through the global economy. Frightening facts, figures, graphs and charts dominated the media leaving property owners in a state of panic. House prices dropped to a three-year low as consumers' confidence in the market grew weaker. The UK remained in limbo, nervously anticipating the famous ‘Article 50’.
Two months on and one prime minister later, things seem to be levelling out – albeit little by little. Though the UK technically remains part of the EU for the time being, we’re beginning to see the wood from the trees economically - but does Brexit hold any further surprises for the UK property market? We’ve conducted a health check on both the commercial and residential property market as well as the letting environment to investigate whether now is the right time to invest.
Residential Property
While it’s true that the outcome of the EU referendum caused a slowdown in the UK housing market, surveyors and analysts now point to the general uncertainty and initial panic as the leading catalyst in the slump. However, with conflicting news articles and opinion pieces rolling out everyday regarding the impacts of Brexit on the residential housing market, it can be difficult to sort facts from fiction.
In their recent survey from July, the Royal Institution of Chartered Surveyors (RICS) stated that the coming few months would undoubtedly be tough, with interest from potential house buyers falling at its fastest rate since the financial crisis of 2008. RICS research of surveyors also found that 27% of surveyors expected house prices to fall drastically in the wake of Brexit.
However, surveyors remain confident that this price correction and slump in the market will be short lived. While July 2016 saw 16,000 fewer sales compared with July 2015, property expert Henry Pryor states that these transaction figures from HM Revenue and Customs reflect only a "slight stutter" in the UK sector. In fact, surveyors remain positive about the medium to long-term prospects for the UK property market, expecting to see a surge in prices by an average of 14% in the next 5 years.
House builders too are confident about their position, recognising the immediate drop in activity in the initial fallout of Brexit but positive that the next 12 months will show a slight rebound.
While we can’t say for certain whether this will prove accurate, there are certain silver linings that have already begun to take effect. As property investors worked to close their transactions before the EU Referendum and changes to Stamp Duty rates, the market opened up, giving first time buyers a chance to get a foot on the ladder due to reduced competition. In London alone, first time buyers grew their share in the market from 22% in the first quarter to 34%, meaning they are now the most common type of buyer in the capital.
To buy or not to buy?
With the summer slowdown and the impact of Brexit on house prices, buyers may be in a stronger position to negotiate a better deal. Buyers will be able to take their time, put in a lower bid than they would have before the EU Referendum and walk away if the deal isn’t good enough. Furthermore, with Buy To Let investors shying away from the market due to changes to Stamp Duty rates on second homes, the market becomes a lot more open for potential buyers to get in while the market is quiet.
Commercial Property
Commercial property felt the immediate impact of Brexit as British investors withdrew £1.4bn of their money in the wake of the result, forcing retail property funds holding over £15bn of assets to suspend trading. The Q2 2016 RICS UK Commercial Property Market Survey points to political and economical uncertainty as the reason for the downturn in the commercial property market, pushing rental and capital value projections into negative territory.
Occupier demand for commercial property also faced a decline for the first time since 2012, with the office and retail sectors facing the steepest decline. However – since the amount of commercial space did not increase, prices have remained mostly unchanged and could see a rise in the coming year.
Jeff Matsu, senior economist at RICS, stated that momentum had already begun to slow with the drop in confidence being the most prominent in London. However, he remained uncertain as to whether this would carry on in the long term:
“Whether or not the sharp deterioration in the RICS survey data is a knee-jerk reaction that will unwind as the result is digested, or the start of a more prolonged downturn, remains to be seen," he said.
The effect of Brexit on the commercial property market in the UK remains debatable. While a reduction in the value of the pound could negatively impact the GDP and hurt rental growth, a weaker pound could attract the interest of foreign investors turning to the UK to purchase property at a cheaper price. This mirrors the effects of the global financial crisis of 2008 when overseas buyers constituted two-thirds of office property transactions in the UK.
To buy or not to buy?
”Economic uncertainty is rarely a positive for any market,” says Patrick Scanlon, a commercial research partner at Knight Frank. “There is likely to be some release of office space as businesses tighten their belts to weather the period during which trade treaties are being negotiated. However, currently availability levels are particularly low and the development pipeline remains fairly limited. The market has capacity to absorb a rise in supply before there is a possibility of a fall in prime headline rents.”
It may be a wise move to hold off, but keep a close eye on the market as new opportunities could potentially arise in the coming year.
Buy to Let
While the commercial property market has suffered a critical hit in the confidence of both investors and occupiers, the lending market remains for the most part unchanged for the time being. The results of a survey conducted by Shawbrook Bank revealed that investors across the UK were seemingly positive about the coming year, with 57% of respondents claiming to be confident about their investments. Furthermore, the proportion of investors looking to purchase an additional Buy To Let property has increased to 58% compared to 56% in 2015.
However, while confidence among investors remains unchanged, 32% of respondents still recognise it as the greatest challenge they will face in the coming 12 months. It goes without saying that the fluctuation in house prices and economic uncertainty could pose a problem for landlords – specifically due to banks and building societies holding off on aggressive buy to let lending until stability in house prices has returned.
Newcastle BS, Barclays, Foundation Home Loans and TSB have all declared that they will limit buy-to-let lending in the wake of the decision to leave the EU by increasing their rental coverage ratio to 145%. From next April, landlords will no longer be able to counterbalance their mortgage interest costs against their rental income, putting many investors under significant financial strain.
To buy or not to buy?
With the change to Stamp Duty rates and mortgage lenders raising their rent cover ratio, a large handful of landlords may choose to hold off on investing in fear of seeing minimal return. However, with would-be homebuyers putting off their purchases until the market has cooled down, landlords may see an increase in demand in the rental sector from a large number that want to play it safe for the time being. Furthermore, the truth about Buy To Let is that there is always demand, as people who cannot afford to own a home need places to live. With a new academic year approaching, students across the UK will be searching for leases; a perfect opportunity for landlords.
Looking for strategic advice on your property investment? Get in touch with Jeremy Clough or Rebecca Kefford on 01202 292 424 or send an email to jec@prestonredman.co.uk or rmk@prestonredman.co.uk
