United Kingdom

Investing in UK property: Pros & Cons

The property market in the United Kingdom remains sluggish, in the face of Brexit

confusion

House prices in the United Kingdom are still rising, at least in nominal terms (i.e. not adjusted for inflation). But the prospects of the property market are already clouded by the uncertainties about Brexit and the forthcoming general elections.

The average house price in the United Kingdom rose by a modest 0.3 percent to £216,805 (USD 276,968) during the year to Q3 2019, according to Nationwide – a decline from last year’s 2.1 percent increase. London reported the highest fall in house prices of 1.7 percent (-3.4 percent inflation-adjusted) over the year to Q3 2019.

The Outer Metropolitan Area of London and the Outer South East also reported a decline in house prices of 1.5 percent and 0.6 percent respectively (-3.2 percent and-2.4 percent in inflation-adjusted terms).

The highest price rise was in Northern Ireland, with house prices rising by 3.4% over the year to Q3 2019 (1.5% inflation-adjusted). Wales, North West , West McCain, North and East Anglia followed. Regions with smaller price increases included Scotland, South West, East McCain and Yorkshire and Humberside.

Demand is still decreasing. In the first three quarters of 2019, completed residential property sales declined by 1.1 percent from the previous year.

However, persistent housing shortages would avoid a substantial fall in prices, according to the Royal Institution of Chartered Surveyors (RICS). Land sales are projected to decline by around 5% from the previous year in 2019. October has been full of political games, and with the continued Brexit volatility, many buyers and sellers have embraced a ‘wait and see’ strategy, according to Jerald Solis of Experience Invest.

UK average house price graph

The UK economy is expected to expand by 1.3 percent this year, down from 1.4 percent in 2018 and the slowest since 2012, according to the Bank of England.

There are no limits on international possession of property in the United Kingdom.

Rental Yields

London’s yields are low

London’s housing values have been declining in high-end districts. But by numerous metrics, London remains incredibly costly.

This has an effect on residential revenue, as rentals have not increased as much as prices. Gross rental yields, i.e. the total annual rental income for an investment in an apartment if entirely leased out, is now very small in London.

Overall, rental property is best off on the prime fringes than in central London.

Surprisingly, however, larger apartments often have higher yields in the center – particularly in the more expensive districts of London. This defies the nearly general concept in many cities that smaller flats have higher rental incomes. Why is that the case in London now? This is due to the remarkably high United Kingdom stamp duties on super-expensive property purchases, which dissuade high-flyers from purchasing. People prefer to rent because they live for only a few years there, because the net cost of renting high-end properties is lower than the total cost of buying and selling them. High capital gains taxes on selling, and worries around Brexit, amplify the argument that renting now makes sense for the rich in London.

Foreign residential property investors in Britain have long been faced by an growing uproar of resentment from the British public over exorbitant London house rates, which are, rightly or wrongly, partially blamed on the vast number of international buyers, as well as on the continuous influx of immigrants to London. They’re both hot-button topics.

One outcome is that foreign buyers are now liable to capital gains taxes as they sell their UK assets. Another is that stamp duty has been raised on higher-end properties. There is discussion of more measures – it is generally accepted that the Council’s tax on high-end property is too low, and the Liberal Democrats have been agitating for a mansion tax.

Roundtrip transaction costs are now higher in the UK than they were in the past, particularly in London due to higher stamp duties on expensive assets.

Buying Guide

Roundtrip transaction costs modest in Britain, can be high on high-end assets

Overall roundtrip transaction costs range from 3.90 percent to 12.16 percent. Nearly all investors, whether UK-based or not, have lawyers as well as real estate brokers. Judicial fees vary from 0.5 percent to 1 percent, while agent fees vary from 2 percent to 3.5 percent, plus 17.5 percent VAT.

Landlord and Tenant

UK law is pro-landlord

Rents: Owners and renters are free to decide together on rent rates. They can openly decide to some method for increasing rent rates. Deposits are legal.

Tenant Protection: Contracts automatically revert to a regular monthly contract which, after an initial duration of six months of protection of tenure, allows the tenant to be evicted at two months’ notice. But the eviction process can be detrimental to the landlord.

ECONOMIC GROWTH

Sluggish expansion anticipated in 2019; Exit deal still in limbo

The UK economy expanded by 1.4 per cent in 2018 from the previous year. Then, in Q3 2019, the economy grew by a minuscule 1% from the previous year, according to the Office for National Statistics (ONS) – the lowest y-o-y growth in almost a decade.

The estimates for GDP growth per capita in the United Kingdom are unimpressive. According to the International Monetary Fund (IMF), GDP growth per capita was 0.8% in 2018.

In general, the recovery of the United Kingdom since the recession has been, at best, anaemic. In past recessions, growth was above normal. The prosperity of the United Kingdom depends mostly on its services sector, according to the ONS.

The Bank of England recently reduced its forecast of economic growth to 1.3 percent in 2019 from its earlier projection of 1.5 percent.

UK's GDP Growth & Inflation graph

The United Kingdom was initially expected to leave the EU on 29 March 2019, The EU has agreed to extend the duration until 31 January 2020.

Any deal that the United Kingdom reaches with the EU now relies strongly on the results of the general election to be held on 12 December 2019. If Johnson’s Conservative Party gains a parliamentary majority, the UK will be on schedule to leave the EU on 31 January, and decreased volatility is likely to raise industry and consumer morale. However, if no party manages to win a majority, the UK economy is likely to remain in limbo with increased chances of a delay and probably a second referendum.

In Q2 2019, the United Kingdom’s total unemployment rate was 3.9 percent, marginally lower than 4 percent a year ago, according to the ONS.

UK inflation was 1.7% in September 2019 , down from 2.2% a year ago, in the wake of a decline in energy rates due to a decrease in petrol prices.

Manchester

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Birmingham

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London

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