Tal Orly, international realty law expert and founder and CEO of Cogress, examines the changing face of British property investment
Unsurprisingly, uncertainty surrounding the outcome of Brexit negotiations is continuing to overshadow the UK property market.
Forecasts by KPMG Economics do predict momentum to pick up again once the UK leaves the EU in 2019, but Brexit is not the only factor affecting the property market.
Industry experts and investors are watching for any changes to interest and currency rates, property related taxes, housing policy and economic growth, as the property market progresses through 2018.
We also need to consider macro trends and the UK’s capacity to attract investment and businesses, as these will have great implications for current and future property developments.
However, London’s role as a leading global financial hub is not expected to be dramatically affected in the same way some had initially feared and so property prices in the capital are predicted to hold firm.
Validating this assertion is Deutsche Bank signing a new lease for its London headquarters last August.
Meanwhile, with London attracting record levels of investment in the first half of 2017, the city shows to be strongly defending its title as Europe’s tech hub.
As well as being the cradle of the country’s innovation, London is still attracting major foreign companies. Snapchat, Facebook and Apple have all recently signed office leases.
London property has long been unique in that it serves as a haven for foreign investors besides for its local population’s demands.
While the uncertainty London faces has challenged this previously staunch offering, the lure of the weak pound since the UK voted to leave the EU has offset any significant slowdown in foreign investment.
And where London leads, the rest of the UK should follow. Property markets outside the capital are expected to be boosted in 2018 by the developments of Crossrail, Thameslink, and HS2, while regions in the north of England are finally anticipated to benefit from Northern Powerhouse-related initiatives.
As an example, Reading continues to attract investment and secure development growth due to its Crossrail link to London, a strong tech economy and an increased number of building permissions have delivered more than one-third of new housing stock.
And although expectations have recently risen for a further interest rate rise by the Bank of England from 0.50 per cent, opinions remain divided about when and by how much interest rates will change.
A rise will affect the affordability of borrowing for homeowners who have grown used to ultra-low interest rates. But the Bank of England is aware of this and will surely be cautious to economic growth in 2018.
Further increases are, therefore, expected to be modest but would place additional strain on households already stretched amid higher than target inflation and weak wage growth over recent years.
Another segment experiencing significant change is the buy-to-let market. That change is likely to evolve into a direct challenge in 2018 driven by profound tax changes.
In April 2016, higher stamp duty charges on second properties came into effect and buy-to-let lending showed a significant decline with further regression expected to continue into 2018.
Additional punitive tax measures aimed at buy-to-let landlords will reduce the mortgage interest offset that can be claimed back from the taxman.
The overall effect will make managing highly leveraged buy-to-let properties unprofitable for landlords who don’t restructure their affairs with potential restructuring to corporate vehicles attracting Stamp Duty Land Tax’s +3 per cent charges.
The opportunities and challenges headlining 2018 so far are setting the stage for an exciting year for the UK property market.
But it could be one in which we may see the end to the everyday landlord and the migration to new instruments for residential property exposure.