UK property 'a once-in-a-generation opportunity for Middle East investors'
With Brexit negotiations rumbling on, London and further afield still appeals
Landlord Jas Sanger clicks a few buttons on his laptop and smiles.
Up pops a sterling-to-dollar conversion chart showing how the British pound tumbled by its largest one day fall this year following British Prime Minister Theresa May's Brexit statement in September suggesting that the chances of Britain leaving the European Union next year without a trade deal are increasing.
“If there was a time to buy UK property I would say it is now,” says Mr Sanger, a Dubai resident with £14 million (Dh66.8m) of real estate assets in the UK spread across buy-to-let terraced houses in London and new build developments. “The exchange rate is brilliant. We are basically getting more for our buck at the moment. Mortgage interest rates are low. There are more and more expat lenders coming to the market and the uncertainty caused by Brexit and the end of mortgage interest relief is keeping a lid on prices.”
Mr Sanger, a British financial director at recruitment firm Mackenzie Jones Middle East, is just one of a number of overseas property investors putting dirhams into UK property at the moment in the hope that they can take advantage of the weak pound and softening prices in the run up to Britain's plan to leave the European Union in March 2019.
Many commentators expect that if the British government were to agree a trade deal with the EU, the value of the pound which has bubbled along at a good tenth below its pre-referendum levels since June 2016, could rise, wiping away much of the discount currently enjoyed by those currently buying in dollar-linked currencies and reducing access to a market which enjoys strong long term fundamentals.
Adam Price, managing director at Dubai developer Select Group calls this window a “once-in-a-generation investment opportunity,” and reports a sharp spike in the number of Middle Eastern investors looking to buy.
“The appeal of London amongst the Middle East cohort appears to be strengthening once more," says Faisal Durrani, Cluttons' head of research. “With the currency advantage for Middle East investors, who are effectively US dollar purchasers due to fixed exchange rates, there may be the perception of a reversal in the buying advantage as sterling recovers to an extent. Furthermore, with oil prices starting to tick upwards once more, disposable incomes and the appetite to invest overseas will undoubtedly rise in parallel.”
Cluttons estimates that the proportion of Middle Eastern investors buying property peaked in the wake of the 2016 referendum when they accounted for more than a fifth of all property sales to international investors in London. Over the past year that level has fallen back in line with historic norms of between 15 and 20 per cent of all London sales to non-UK residents. But, now, with just months to go before the UK's planned leave date, that proportion is rising again - albeit on a volume of sales which has dropped by nearly a fifth since 2014, according to Cluttons.
That's despite the fact that those who rushed into buy prime London homes in the aftermath of the referendum, so far will have so far been running at a loss on their investments.
According to Knight Frank, average house prices in the nicest London neighbourhoods stood 2.3 per cent lower in August 2018 than a year earlier after dipping 0.7 per cent in 2017 and 6.3 per cent in 2016.
Even away from London's elite postcodes, house price rises across the country are slowing to less than 5 per cent a year. According to data from the Office for National Statistics, average house prices in the UK increased by just 3.0 per cent in the year to June 2018.
In September, Mark Carney, the governor of the Bank of England, told the British cabinet that, in the event of a 'no deal' Brexit, UK house prices could fall 35 per cent over the next three years.
If Mr Carney's worst case scenario “stress test” were to come true, a no-deal Brexit could potentially precipitate Britain into a worse recession than it experienced following the global financial crisis 10 years ago, say analysts. Unemployment would rise and the BoE would be forced to put up interest rates which, in turn, could leave many landlords and homeowners exposed.
Although other commentators point out that a 35 per cent fall in average house values derives from an extreme scenario used to test financial stability, many still predict that price growth will soften over the coming years.
Lucian Cook, the director of residential research for Savills in London, points out that after Britain left the Exchange Rate Mechanism, precipitating the country's biggest house price crash in recent memory, prices fell by only around 20 per cent between late 1989 and early 1993.
“I think there will continue to be a cooling of property prices at the higher end of the London market,” says Dubai property investor Adam Amode. “A slight correction may have been in order anyway.”
Knight Frank expects average UK house prices to increase by just 1 per cent in 2018, 2 per cent in 2019 and 3 per cent in 2020. Savills predicts increases of 1 per cent in 2018, 2.5 per cent in 2019 and 5 per cent in 2020.
National house price statistics also belie a more mixed regional picture with average house prices in regional cities such as Edinburgh, Birmingham and Manchester rising by between 6 and 8 per cent last year - a scenario likely to continue growing over the next few years.
“Rather than accepting lower yields and higher investment values in London, UAE investors are looking for higher yields in the regional cities, Manchester, Liverpool and Birmingham,” Mr Amode adds. “These areas are also anticipated to rise faster than the capital over the next few years.”
Yet, rather than travel higher up the risk curve to invest in second and third tier cities which could take longer to recover from any major economic downturns, the political and economic uncertainty is prompting many people – including potential UAE investors - to sit it out at the moment, waiting to see what happens.
“It’s fair to assume many UK homeowners would hold off making a move in the market in the event of a no-deal, at least until the UK’s future working relationship with the EU, in addition to its strength in a global trade market, has been established,” says Mr Price of Select Group.
And so, for UAE investors, keen to get into the sector, this poses an interesting conundrum – go ahead and buy while the dirham is strong and the market less competitive but risk losing money if the economy stalls and property prices fall, or wait until the market is more stable but risk losing out on lucrative currency gains.
For Dubai resident Simon Das, it is all a question of how long you wish to hold your property. He points out that for those willing to take a gamble on the short term risks posed by Brexit, the long term fundamentals of UK property remain strong.
“I think house prices will stall as we go into the winter months and await the final Brexit deal,” he says. “I will be looking for bargains and am confident that prices will bounce back in time however much they suffer. I hold my property and the rental market will stay strong as demand continues to outstrip supply nationally. It's like any other business, if you understand the market then you can always find the opportunities.”
Mr Sanger, who set up a company, Chessington Mansions, to manage his UK assets also owns his own home in the UAE. He says investors should not wait to buy property, but should buy and wait.
"Property investing is not a short term investment. I remember buying a property for £280,000 in 2008 at the time of the financial crash. It was in negative equity within eight weeks of purchase," he says. "Then my rent increased by £50 per month and mortgage interest rates went down so I was actually making more money. I held onto that property and its just had planning permission passed for two houses to be built on the site for £950,000."
Updated: November 5, 2018 02:52 PM