Changes to foreign ownership, Brexit and technological trends will shape the year ahead in property investment for 2019, writes Frederick Bristol
Investing in property is part of any balanced portfolio. The British obsession with property ownership has seen house prices increase, ensuring good returns for property investors for well over 23 years since the bottom of the 90s property crash.
Recently several factors have caused the perfect storm for residential property investment: a proposed levy on foreign property ownership, increased stamp duty, Brexit uncertainty, changes in taxation and new legislation on Buy to Let, inflated market valuations and oversupply in some residential sectors. These have all contributed to the lowering and stagnation of property price growth in some parts of the UK.
In this changing market, shrewd property investors should be aware of the important factors, know how to avoid possible pitfalls and where to find potential for good returns.
A levy on foreign property ownership?
For the last decade, the combination of price rises and tax breaks made the capital one of the best places in the world to invest in property. This map produced by Private Eye in 2015 shows how billions of pounds worth of property across the country has been purchased by corporations within tax havens.
This helped to create the ‘ghost town’ phenomenon where some exclusive areas of London are unoccupied. Over the last two decades, the scale of this investment has driven and increased in property prices, not only in the capital but across the rest of the country, resulting in native home buyers being priced out of the market.
This is the ‘buy to leave’ market, where foreign investors purchase properties as investments that they let sit empty as their value increased. This issue has now become part of the political football centred on the causes of the housing crisis. In 2017 Kensington – one of the most affected constituencies – elected its first Labour MP, a sign that the electorate might be pushing for a cure.
At the Tory party conference last September a policy was announced to apply a levy on foreign buyers. In response to the announcement, Labour claimed it was a rehashing of their proposals. So either way that the politics play out over the coming years, a levy on foreign property ownership might no longer be a matter of ‘if’ but ‘when’.
Given that in this current flat market, a third of all UK homes bought in 2018 for £1 million or more were snapped up by foreign investors as second homes, the application of a levy could see millions of pounds of property investment and sales dry up in the capital.
When one considers the historical parallels between London property prices and the rest of UK, a sneeze from the London market as a result of this levy could cause the rest of the UK property market to catch a cold.
There is no doubt that the uncertainty around Brexit has affected investment in England across multiple sectors and property is no different. Given the current political storm, it is possible we will see pent-up demand, as a result of people delaying decisions, revive property post-Brexit (deal or no deal).
A Brexit bounce in mid-2019 could see prices adjusting to reality (whatever that might be) leading to an increase in transactions. The end of uncertainty will also create more favourable conditions for investment and growth, while price adjustments may create the opportunity for increased ROI’s.
In the worst-case scenario of a problematic Brexit, rates are likely to be reduced, and the financial system flooded with liquidity, causing prices to rise.
With the fiscal loosening of the mortgage market in the noughties, Buy-to-Let has become the mainstay of residential property investment. Encouraged by continuous capital growth, the number of landlords has risen from 1.97 million in 2011-12 to 2.5 million in 2018, each owning an average of 1.8 buy-to-let properties and seeing average annual total returns of 9.9 per cent per year since 2000.
Nonetheless, most recent reports have shown that the music is starting to slow for landlords. Increasing regulation, in the form of Ombudsman schemes, Energy Performance Certificates, The Right to Rent and letting fees bans, has come into force since 2016 (or will do so in the next two years).
There is also proposed legislation for a UK-wide landlord licensing system and a rogue landlord database that will name and shame landlords who have been banned from letting properties.
From the financial and tax perspective, cuts in mortgage interest tax relief, the introduction of a 3 per cent stamp duty sub charge, and higher capital gains tax rates on profits for buy-to-let investors have all given landlords such a hammering that many are starting to throw in the towel.
In 2017, the number of privately rented homes in England fell by 46,000 to 4.79 million – the most significant reduction since 1988. Rents may also rise due to increased demand, but as a result of the above, the UK property market is charting a course across unknown waters, as property investment becomes less financially attractive.
Over-pricing and the Housing Crisis
As property prices continued to increase in 2018, it has been argued that homes are too expensive when measured against wages. The median price of residential property in England and Wales has increased by 259 per cent between 1997 and 2016 while, during the same period, median individual annual earnings increased by 68 per cent. Continuous property price growth at this level is unsustainable without the equivalent wage growth, and as prices started to correct to this realisation, the top of the market has suffered the most.
George Osbourne’s stamp duty hike has had a slowing effect, resulting in half of the 1,900 luxury apartments built in London last year failing to sell and creating a surplus of unsold high-end property developments and the creation of ‘ghost towers’.
This oversupply issue is ironic given the extent to which the effects of the housing crisis and the lack of affordable homes dominates the rest of it. In 2017/18, 222,000 new homes were delivered, well below the government’s promised target of 300,000.
The successive failure of governments to hit house building targets and an ever-increasing population since the 90s (even in light of Brexit) has created a shortfall of up to a million homes in England. This shortfall will help underpin prices across the rest of the market and will ensure that, given the right criteria, good returns can still be achieved from property investment.
Adapting to Changes in 2019
Given the choppy waters surrounding the market, it’s understandable why one might feel cautious about investing in property over 2019.
Investors cannot rely on capital growth and rental yields in some areas of the UK for the high returns that were historically all-but guaranteed. Lack of capital growth is an issue in London and the South, driven by oversupply at the top end of the market. In other areas of the country, values continue to grow, especially in the North.
Property as an asset class is considered safer than other investments, especially taking into consideration supply and demand. The increasing population of England is not being matched with a supply of new homes. As long as the supply remains behind the demand, it is unlikely that the property market will collapse, ensuring that the fundamentals for investment are still good.
However, when taking into consideration potential financial storms like Brexit, foreign investment levys, and the now less attractive buy-to-let sector, it can be difficult to see the wood through the trees.
Being able to diversify property investments in a similar fashion to stocks and shares, thus reducing risk, would be a good start. In the past, this has been difficult due to high minimum thresholds and lengthy investment periods required in, say, buy-to-let.
Property investment platforms and prop-tech over the last five years has started to do this by allowing individuals to invest across multiple sectors and locations. This gives investors greater liquidity and diversity across their portfolios, overcoming many problems with associated with more traditional property investments.
The platforms also offer lower minimum investment thresholds into a range of investments from property lending, bonds, development finance or buy-to-let not previously available to smaller investors. Investors can also use their ISA allowance to invest, making them tax efficient.
Property has been slow to adapt to tech, but change in the industry is happening. The growth of Purple Bricks on the agency side of the industry is an example of this. As a result of social, economic and political change, the norms of property investment are moving and as this movement happens the spaces left are being filled by tech startups who can adapt quickly to a changing market.
As another area of the industry adapts to tech, we are at the start of a sea change in the way individuals invest in property. Don’t be left behind.
Frederick Bristol is the CEO of property investment platform, brickowner.com
Main image credit: credit David Jakab