How can property investors prepare for a low interest post-Brexit world?
By Paresh Raja -
The economic indecision and political uncertainty arising from Brexit has been having a profound and evident impact on the UK.
Whichever metric you use, the picture seems to be broadly gloomy: activity in the nation’s private sector is contracting, and despite its September pick-up, the pound has contracted by 16% against the dollar since the EU referendum result was announced back in June 2016.
Importantly, these figures can be seen as a consequence of the government’s poor handling of Brexit – at the moment, Westminster has failed to provide the certainty, clarity and direction for businesses, investors and consumers to confidently plan for the future.
Moreover, with the deadline for withdrawal scheduled for 31st October, we’re still no closer to understanding what the UK’s withdrawal from the EU will look like.
It comes as no surprise, therefore, that the Bank of England (BoE) has implied it could lower interest rates in future months regardless of whether a deal is struck, Brexit is delayed, or a no-deal Brexit transpires.
Lowering the rate of interest was generally assumed if the UK did end up crashing out of the EU without an agreement in place, but Monetary Policy Committee (MPC) member Michael Saunders has suggested that ongoing uncertainty makes a drop-in interest rates likely even in the case of an orderly withdrawal.
So, what does this all mean for the property market and those interested in UK real estate?
The property market and Brexit
We should never let premonitions (often sensationalised) about the future overshadow some of the positive things we have seen in the lead-up to Brexit, particularly when it comes to the performance of the UK property market.
For international investors in particular, the low value of the pound has made UK property more affordable and accessible. Different parts of the market – particularly the private rental sector, retirement and student accommodation – have also been bolstered by wider societal demographic shifts.
Further, the rate of house price growth is rising and overall demand for property has remained strong – only 7% of investors have sold a property as a direct result of Brexit, according to research from Market Financial Solutions.
Nowhere is market confidence more apparent than in the growing demand for bridging loans.
The bridging loan market grew by an impressive 15% in 2018, with more than £4 billion worth of loans deployed, the Association of Short-Term Lenders (ASTL) reported in February.
This demand will hopefully be augmented by government policy. At the 2019 Conservative Party Conference, the government announced some promising plans to loosen planning rules, allowing property owners in towns to add two storeys without planning permission.
Given their flexibility and ability to be deployed quickly, bridging loans are ideally suited to finance house extensions and renovation projects.
As such, reforms touted by the government could lead to an increase in demand for bridging finance. The question is when these reforms will be translated into policy.
Investing in bricks and mortar
Stated simply, low interest rates mean investors have not been making significant returns from traditional savings accounts.
This means more and more people are on the lookout for assets that can offer competitive returns, and property is can often be seen as an ideal choice.
Further, other traditionally high-return assets have been struggling because of Brexit.
Traders are cautious amid concerns over a potential slowdown in China and the US, and the US central banks, has cut interest rates stateside.
Whilst this did result in a FTSE and Dow Jones pickup, the overall picture is one of caution.
In this kind of stagnant environment, it can be prudent to invest in assets that are positioned to offer significant yields, like property.
There is likely to be a short-term house price dip in the immediate aftermath of Brexit as the market adjusts, but property is a resilient asset class and will be positioned better than most to recover.
How should investors plan in the immediate aftermath of Brexit?
Whatever the outcome of Brexit, there is no doubt that there will be a significant period of readjustment as investors, and the sector at large, come to terms with the new economic conditions.
But considering how things have been since the vote of 2016, it would be wise for investors to hold on to their property – as they have broadly done so far.
It is likely that prices will rebound after the initial shocks, and many of the current post-Brexit predictions are optimistic; Savills, for example, anticipates house prices to rise 15% over the next 5 years.
The resilience of real estate as an asset could make for a competitive market, and it is crucial that investors of all kinds have access to the right financing to meet their needs.
Having access to liquid finance, like cash in the bank or a bridging loan, is crucial, and will be important for those looking to make the most of new investment opportunities.
Paresh Raja has an extensive background at one of the Big 4 consultancy firms, specialising in structured finance, and a long-standing career in the commercial and specialist lending sector. He is therefore well placed to discuss anything bridging finance specific, or business more generally. Paresh is now the CEO at Market Financial Solutions which he has developed to become a leading name in the bridging finance space.