UK property market resilient amidst political uncertainty

PETALING JAYA (June 13): While the outcome of the UK general election has not been decisive, thus causing further political uncertainty, the appeal of the UK property market is unlikely to be significantly diminished from an Asian business or investors’ point of view, real estate consultancy firm Knight Frank said in a post-election statement.

“London remains the key European city with education, business and financial ties to large parts of Asia; while the language, legal system, transparency and diversity of its economy will ensure interest remains in the commercial and residential markets,” said Knight Frank’s Asia-Pacific head of research Nicholas Holt.

“With the full political fall-out from the election yet to be seen, some decisions may be put on hold. However, the depreciation of sterling could counteract that to a certain extent, as investors pull the trigger to take advantage of the weaker pound,” he said.

Knight Frank global head of research Liam Bailey added that although political uncertainty will influence the housing market’s performance, the recent trends in the market is expected to largely continue, at least for the remainder of 2017.

He pointed out that prime markets, especially in London, have been experiencing a tentative improvement in sales activity, from the very low levels hit in mid-2016, while price growth remains subdued — both trends seem likely to remain in place.

“The housing market as a whole will likely continue to be supported by ultra-low interest rates, despite the risk of higher inflation due to the weak pound, which should remain a fixture through 2017. The weak pound itself should provide some stimulus for the London market in the form of overseas inward investment,” he said.

According to data from Knight Frank, prime London sales volumes rose by 20% in April and May, compared with the same period last year. The performance of prime sales in the country has been particularly positive; sales have risen by more than half year-on-year. Even against the level of market activity in 2015, sales volumes are still higher by more than 30%.

The mainstream market has seen sales volumes remain relatively upbeat while the rate of price growth across the UK has seen a rapid moderation, with annual growth falling from just under 10% a year ago to around 3% in May.

Knight Frank chief economist James Roberts added: “While it is easy to assume the certainty of a clear majority government would have been the best outcome for the economy, actually this result has several positive points.”

Firstly, the government will probably need the support of several other parties, not just the Democratic Unionist Party, to get any future Brexit deal through Parliament, in order to off-set any Tory backbench rebellions. Consequently, the pendulum has swung against a “hard” Brexit, as a compromise deal will have the best chance of commanding broad support in the House of Commons.

“Also, on a day-to-day basis the next government will be restricted to putting consensual, not controversial, policies through Parliament. This probably rules out any more populist taxes on property, or increases in business regulation. Finally, the swing against the Scottish National Party could mean that the idea of a second Scottish independence is now quietly booted into the long grass,” he said.

In light of the current momentum in the investment market and relative attractions of the UK, plus the likelihood of a weakening currency, Roberts does not expect this result to have a negative impact on overseas investment to the UK, and believes that occupational markets will remain resilient.

Knight Frank also felt that the General Election is far less of an issue for commercial property than Brexit. “Therefore, not only do we expect little or no impact on pricing, there should be upside further down the line via the realisation that ‘hard’ Brexit is receding as a likelihood and that the weaker pound has made the UK more attractive to overseas investors,” said the consultancy firm.

Industrial property has been the best performing commercial real estate sector of late. The firm continues to see this as a strong prospect, but recent outperformance will limit the potential upside in the medium to long term. Office property has perhaps been unfairly tainted by the Brexit issue in the eyes of investors – occupier market statistics have in fact been remarkably steady since the referendum. Therefore, we see offices as a good opportunity, particularly Central London offices, where there is a strong tech story in the occupier market.

Meanwhile, London-based property consultancy firm Cluttons’ head of research Faisal Durrani said the formation of the new minority government, led by the Conservatives will raise the chances of a “soft” Brexit as the prime minister will need to receive cross party support for any deal.

“The diminishing prospects of a ‘hard’ Brexit should eventually translate into a boost in investor sentiment as the odds of a deal that, in the prime minister’s words, is ‘good for Britain’ rises. Furthermore, calls for a second Scottish referendum are likely to fade, regardless of the outcome of the Brexit talks given the Scottish Nationalist Party’s substantial loss of seats in Westminster,” he said.

Despite being unable to secure a larger majority to govern, Durrani expects the Conservative party to press ahead with their manifesto plans with an added sense of vigour and urgency, albeit many policies and plans are likely to be watered down to make them more palatable to all parties.

“When it comes to the property sector, we expect the Conservatives to move ahead with plans to deliver one million new homes in Britain by 2020 and a further 500,000 by 2022. 160,000 homes are expected to be delivered through the use of public sector owned land, while proposals outlined in the February Housing White Paper around an accelerated delivery programme through modern construction methods are likely to gain further traction. Questions around the diminishing construction sector talent pool are yet to be addressed and are likely to be further exacerbated in the event of any rigid immigration policies in post-Brexit Britain,” he noted.