Affirming the place of international investment in the UK property market

A quick look at the financial headlines of the day will confirm what most of us already know; Britain has a long way to go in its post-pandemic recovery.

Nevertheless, economic momentum in the real estate sector remains strong and it will be crucial for the economy that this continues.

Significantly, the real estate sector has shown exceptional resilience over the past two years, posting impressive growth despite the side effects of the pandemic and the slowdown in most other sectors.

Home buying hit record levels last year, with many drawn to brick-and-mortar plants, likely due to its reputation as a safe long-term investment.

Its strong momentum has continued into 2022 as record-breaking purchase rates suggest the real estate boom isn’t over yet.

This includes real estate appraisals. Nationwide’s May home price index reported that home prices rose 0.9%, marking the 10th straight month of growth.

While UK property performance has been reassuring in two years of financial slowdown, it is important to acknowledge the challenges ahead.

With inflation set to rise throughout the year and interest rates as a result, experts are predicting a slowdown in the market.

Indeed, the health of the economy and the health of the property market are inextricably linked and to see both continue to grow the UK will need to take full advantage of its reputation as a ‘safe haven’ for property and welcome the expected return of international investors when the world opens up again.

Capitalize on foreign investments

Undeniably, the disruption to international investment at the start of the pandemic was felt across all markets, particularly UK property, which is deeply entrenched in global connectivity. Despite this, UK property companies continue to see the benefits of being able to attract foreign investors.

According to Knight Frank’s 2022 Wealth Report, London had more cross-border private capital invested in real estate in 2021 than any other city in the world, with over US$3 billion.

Their forecasts say that trend will continue in 2022, with another $24 billion to be invested in the capital.

Undoubtedly, London’s prestige carries considerable weight, although investors are beginning to look to the potential value to be had elsewhere in the country.

Northern cities such as Manchester, Liverpool and Leeds have made notable investments in recent years, with many realizing the potential value for money compared to the capital.

In fact, the North West and West Midlands have shown the strongest rental returns in recent years.

Having more capital spread across the country is of course a major benefit, particularly when you consider the state of the UK housing stock.

Every year the demand for real estate goes unmet and the deficit has plunged the country into a deep housing crisis.

The government’s stated goal is 300,000 new homes a year, while some studies estimate that 340,000 a year are needed – of which 145,000 should be affordable.

However, these numbers are not adhered to. Therefore, a liquidity boost from foreign investment has the potential to boost the sector by driving the implementation of large-scale developments, thereby helping to meet supply targets.

External factors could delay international investment

So the question is whether Britain can maintain its “safe haven” status amid the current financial crisis.

Of course, it is important to consider the macroeconomic headwinds that could slow the pace of growth.

Surely anyone looking to add real estate to their portfolio will watch rising interest rates 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 on a tracker or adjustable rate mortgages will see their payments increasing, while those considering taking out a new one will have to factor in higher mortgage rates than they would have experienced last year.

Rising interest rates are a symptom of rising inflation, which also creates other problems for investors.

Post-pandemic demand and the war in Ukraine have pushed prices higher and are expected to rise 10% this year — the highest rate in 40 years, along with higher energy bills and commodity prices.

Inflation combined with higher mortgage payments can reduce rental yields and, of course, property value if house prices fall – as expected.

These financial pressures may be enough to deter some, but given robust global pent-up demand and the asset being viewed as a good hedge against inflationary pressures, it’s likely that real estate investing will continue to prove resilient.

Not to mention that the fall in sterling since the UK left the EU means that favorable exchange rates will keep investors’ money expanding.

There is no doubt that the property market has had a huge impact on the UK economy.

Harnessing the higher levels of investment in the market will then move the UK as a whole, accelerating housing delivery and keeping the post-pandemic recovery on track.

Jamie Johnson
Jamie Johnson is CEO of FJP Investment, a provider of property-based investments in the UK and abroad to a global audience of high net worth and sophisticated investors, institutions and family offices.

Founded in 2013, the company also works with developers to provide them with an easily accessible source of funding for their development projects.

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