A brief look at the day’s financial headlines will confirm what most of us already know; the UK has a long road ahead in its post-pandemic recovery.
Yet, economic momentum has remained strong in the property sector, and it will be crucial for the economy that this continues.
Tellingly, property displayed marked resilience throughout the past two years, showing impressive growth despite the side-effects of the pandemic and the slowing down of most other sectors.
House buying reached record levels last year, with many gravitating towards bricks and mortar assets, likely due to its reputation as a safe long-term investment.
Its strong momentum has continued into 2022 as record-breaking rates of buying indicate that the property boom is not over yet.
This includes property valuations too. Nationwide’s May house price index reported that house prices increased by 0.9%, marking a tenth consecutive month of growth.
While the performance of UK real estate during two years of financial slowdown has been reassuring, it is important to acknowledge the challenges ahead.
With inflation set to rise throughout the year, and subsequently interest rates too, experts are predicting a cool down of the market.
Indeed, the health of the economy and the health of the property market are intrinsically linked, and in order to see both maintain growth, the UK must take full advantage of its reputation as a real estate ‘safe haven’ and welcome the anticipated return of international investors as the world reopens.
Capitalising on overseas investment
Undeniably, the hiatus of international investment was felt across markets at the beginning of the pandemic, certainly, in UK real estate, which is deeply rooted in global connectivity. Despite this, UK property continues to see the benefits of being able to attract overseas investors.
According to Knight Frank’s 2022 Wealth Report, in 2021, London saw more cross-border private capital in real estate than any other city in the world, with over $3 billion invested.
Their forecasts estimate this trend to continue over 2022, with a further $24 billion expected to be invested in the capital.
Undoubtedly, London’s prestige carries considerable weight, although investors are starting to pay attention to the potential value to be had elsewhere in the country.
Northern cities such as Manchester, Liverpool, and Leeds have seen notable investment in recent years, with many recognising the potential value for money compared to the capital.
In fact, the North-West and the West Midlands have shown the strongest rental yields in recent years.
More capital spread out across the country is, of course, a huge positive, particularly when considering the state of the UK’s housing stock.
Each year the demand for property is not met, and the deficit has plunged the country into a deep housing crisis.
The government’s stated target is 300,000 new homes per year, while some studies estimate that 340,000 a year are needed – of which 145,000 should be affordable.
These figures, however, are not being met. As such, a cash boost from overseas investment has the potential to uplift the sector by fuelling the delivery of large-scale developments, thus helping to meet supply targets.
Could external factors delay international investment
The question, then, is can the UK maintain its ‘safe haven’ status amid the current financial crisis.
Naturally, it is important to consider the macroeconomic headwinds that could slow down the pace of growth.
Certainly, anyone interested in adding property to their portfolio will likely be watching the rising interest rate with caution.
Interest rates, which have risen to 1.25%, are a negative headwind as they tend to precede a rise in mortgage rates.
Those operating on a tracker or variable rate mortgages will see their payments rise, while those contemplating taking a new one out will have to factor in higher mortgage rates than they would have experienced last year.
Rising interest rates are a symptom of soaring inflation, which also brings further problems for investors.
Post-pandemic demand and the war in Ukraine have pushed prices up and are set to rise to 10% this year – the highest rate for 40 years, alongside increased energy bills and goods prices.
Inflation coupled with higher mortgage payments can reduce rental yields, and of course, the value of the property if house prices slow down – as is expected.
These financial pressures may be enough to deter some, but given the robust levels of pent-up global demand and the fact that the asset is perceived as a good hedge against inflationary pressures, it is likely that real estate investment will continue to show resilience.
Not to mention, the drop in the pound since the UK’s withdrawal from the EU means that favourable exchange rates will see investors’ money stretch further.
There is no doubt that the property market has a tremendous influence over the UK’s economy.
Harnessing the greater levels of investment in the market will subsequently bring fluidity to the UK as a whole, accelerating the delivery of housing and keeping the post-pandemic recovery on track.