The impact of Brexit on the property industry Paresh Raja is CEO of Market Financial Solutions In the two years following the 2016 EU referendum – the unexpected result of which cast doubt over the future of the national economy – the UK property market has proven remarkably resilient. Worth an estimated £5.9 trillion to the British economy, UK property has continued to remain a popular investment destination despite uncertainty surrounding the country’s withdrawal from the EU. Property in the UK has traditionally been an attractive asset class for both domestic and international investors, and this is reflected in the rise in national house prices since the year 2000. Moreover, demand for real estate has not been deterred by the EU referendum result. In fact, at the beginning of 2018, 53% of the British public would rather invest in traditional asset classes such as property instead of opting for newer classes. The same study, conducted by Market Financial Solutions (MFS), revealed that 63% of UK adults regard property as a safe and secure asset. Accompanied by large volumes of foreign investment into commercial and residential real estate, positive domestic investor confidence therefore continues to stimulate growth in the sector. With Brexit inching closer – the 29th of March 2019 marking the UK’s official departure date from the EU – the country is preparing for series of significant political and economic reforms. It remains largely unclear, however, what exactly the nature of the UK’s changing relationship with the Single Market will mean in practical terms. Although negotiations between the UK and the European Commission have yet to clarify what can be expected in the coming months and years, current trends in the property market offer useful insight into what the future might hold for the industry. A promising outlook As with all major sectors, the property market reacted immediately to the EU referendum result, with house prices dropping as a result of the vote. Financial commentators also feared people would be ultimately dissuaded from property investment in the UK, leading to cynical forecasts about the future of the housing sector. This sudden dip in confidence post-referendum, however, proved to be short-lived. The property market quickly picked up once more, and since then, house prices have continued to rise across the UK. In fact, an index released jointly by the Office for National Statistics and the Land Registry revealed that that the average house price in December 2017 – just six months after the EU referendum – was some £12,000 higher than in December of the previous year. The steady rise has continued until the present date – in July 2018, the national house price average reached a new high of £230,280 according to recent figures by Halifax. Driven most notably by the impressive growth in the midlands and North East of England, this trend is a promising sign for investors and prospective homebuyers hoping to invest in the property in the near future. Fuelled by strong confidence in the market, the demand for property remains persistently strong. The latest Emoov National Property Hotspots Index shows demand across London has increased by 2% since the beginning of 2018, while overall nationwide demand has gone up by an impressive 8% so far this year. Difficulties faced in securing a property High demand for property across the UK has led to a national housing shortage, with the government struggling to keep up the supply of housing to satisfy demand. This has increased the number of people unable to complete on property transactions. The presence of length property chains, for instance, in a competitive housing market can make it even more difficult to secure a property acquisition. Being stuck in a property chain – that is, being unable to purchase a new house without completing the sale of a current one – increases the risk of a property falling through and can have a huge effect on the overall growth of the market. Property chains are such a great problem for prospective buyers, that a recent survey conducted by MFS revealed that more than half (55%) of Britons strongly support the introduction of anti-gazumping measures. With banks tightening their rules after the EU referendum to prepare for potential economic shocks, the process of obtaining a mortgage from a traditional, high-street lender has become more burdensome and lengthier. Earlier this year, analysts at Capital Economics revealed that 19% of lenders had reported a fall in approved loan applications – the highest reading seen in over 5 years. Any delays in the application or lending process can lead to a fall-through of a sale. The recent interest rate hike – which saw the Bank of England raise the base rate from 0.5% to 0.75% – is unlikely to make a significant difference to the property market. However, this increase does mean that the interest rate is the highest is has been in the decade since the 2008-09 financial crisis. The cost of obtaining a mortgage will thus be slightly higher – however those currently struggling to pay of an existing variable rate or tracker mortgage are likely to feel the biggest strain. This change means that these borrowers now face higher rates of repayment, adding further pressure on UK households. A higher interest rate might also mean that banks will now exercise even more caution when it comes to approving mortgage applications. Already faced with rigid regulations and lending rules, it is likely to become even more difficult for prospective homebuyers to obtain finance to fund their property purchase. A rise in alternative finance Alternative finance options such as bridging loans are becoming increasingly popular with investors and homebuyers, giving them the flexibility to quickly and confidently complete on property acquisitions. And especially with the risk of house sales falling through due to delays in obtaining funding, alternatives such as a short-term bridging loan secured on a current asset can allow prospective buyers to quickly take advantage of the opportunities on offer. A failure to obtain funding in good time can risk prospective homebuyers losing out on a property. MFS recently revealed that 33% of those who have experienced a failed property deal in the last ten years have encountered problems due to delays from the bank providing their mortgage. A further 16% of buyers said that their purchase fell through because, despite having a mortgage in principle, the lender later rescinded the agreement. Alternative finance is therefore a convenient option for those in need of a temporary solution to a shortage of funding. And with high demand for property, having access to quick finance is crucial to completing on a house purchase. Looking to March 2019 Looking to March 2019, the current direction of the property market indicates a positive outlook for the future of the sector. The upcoming political and economic changes could bring new opportunities for domestic and international investors alike looking to secure a property in the UK. With house prices continue to rise, alternative finance solutions will also continue to provide support for those that are looking to take advantage of future real estate opportunities. The under-supply of housing remains the biggest property concern; however, the current Conservative Government has pledged to deliver 1 million homes by the end of 2020 and half a million more by the end of 2022. With strong demand for property and evident Government intention to boost the supply of available housing, awareness surrounding alternative finance instruments such as bridging loans will ensure investor are able to act confidently and quickly.
... the current direction of the property market indicates a positive outlook for the future of the sector. The upcoming political and economic changes could bring new opportunities for domestic and international investors alike looking to secure a property in the UK