Reaffirming the place of international investment in the UK property market

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

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

Tellingly, real estate has shown marked resilience over the past two years, posting impressive growth despite the aftereffects of the pandemic and the slowdown in most other sectors.

Home buying hit record highs last year, with many focusing on brick-and-mortar assets, likely due to its reputation as a safe long-term investment.

Its strong momentum has continued into 2022, as record purchase rates indicate that the housing boom is not yet over.

This also includes real estate appraisals. The National House Price Index for May indicated that house prices rose 0.9%, marking a tenth consecutive month of growth.

While the performance of UK property during two years of financial downturn has been reassuring, it is important to recognize the challenges ahead.

While inflation is expected to rise throughout the year, and therefore interest rates as well, experts predict a cooling of the market.

Indeed, the health of the economy and the health of the property market are intrinsically linked, and for the two to sustain 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.

Capitalize on foreign investment

Undeniably, the international investment hiatus was felt in all markets at the start of the pandemic, certainly in UK property, 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 the Knight Frank Wealth Report 2022, in 2021 London saw more cross-border private capital in property than any other city in the world, with over $3 billion invested.

Their forecasts estimate that this trend will continue in 2022, with an additional $24 billion expected to be invested in the capital.

Undoubtedly, London’s prestige carries considerable weight, although investors are beginning 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 recognizing the potential value for money compared to the capital.

In fact, the North West and West Midlands have posted the highest rental yields in recent years.

More capital spread across the country is, of course, a huge plus, especially considering the state of the UK’s housing stock.

Every year, real estate demand is not satisfied and the deficit has plunged the country into a deep housing crisis.

The government’s stated target is 300,000 new homes a year, while some studies estimate the need for 340,000 a year – of which 145,000 should be affordable.

However, these figures have not been reached. As such, an increase in cash from foreign investment has the potential to boost the sector by fueling the delivery of large-scale developments, helping to meet supply targets.

Could external factors delay international investments?

The question is therefore whether the UK can retain its “safe haven” status in the context of the current financial crisis.

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

Certainly, anyone interested in adding a property to their portfolio will likely watch rising interest rates with caution.

Interest rates, which hit 1.25%, are a headwind as they tend to precede a rise in mortgage rates.

Those operating on tracker or variable rate mortgages will see their payments increase, 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 runaway inflation, which also poses other problems for investors.

Post-pandemic demand and the war in Ukraine have driven prices up and are expected to hit 10% this year – the highest rate in 40 years, alongside rising energy bills and property prices.

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

These financial pressures may be enough to deter some, but given robust levels of pent-up global demand and the fact that the asset is seen as a good hedge against inflationary pressures, real estate investing is likely to continue to do proof of resilience.

Not to mention that the fall of the pound since the UK’s withdrawal from the EU means that favorable exchange rates will see investors’ money stretch further.

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

Exploiting the higher levels of investment in the market will subsequently bring fluidity to the UK as a whole, accelerating housing delivery and keeping the post-pandemic recovery on track.

Jaime Johnson
Jamie Johnson is the CEO of FJP Investment, an introducer of property investments in the UK and overseas to a global audience of wealthy and sophisticated investors, institutions as well as family offices.

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

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