There is no denying that investors have faced a rough ride over the past 18 months, with the seismic effects of the pandemic resulting in global recessions and wild fluctuations across almost every financial market. Given this market volatility, it is no surprise that cautious strategies have prevailed – in the UK, the conservative approach has been exacerbated by further uncertainty in the build-up to and fallout from Brexit.
Tellingly, the property market has weathered the storm stoically, emerging relatively unscathed from the pandemic and further highlighting its resilience as an investment asset. Indeed, FJP Investment’s recent report on the impact of the COVID-19 pandemic on investment behaviour found that 39% of UK-based investors are currently gravitating towards more traditional asset classes, such as property, no doubt underscored by the long-term performance of bricks and mortar as an asset.
The buoyancy of the market is further evidenced by the significant surge in house prices over the past year, as shown by all the major house price indices. For instance, according to Halifax, the average house price in the UK reached a record £261,743 in May; a rise of 9.5% in 12 months.
Crucially, as we begin to emerge from the pandemic and the successful vaccination drive allows for the safe return of travel, the UK now looks set to welcome back international investors. This could prove a critical event in sustaining the long-term growth of the property market.
Signs of a turning point?
Knight Frank eloquently described 2020 as “the year passports lost their power”. And there is no question that the hiatus of overseas investment amid the ever-changing travel restrictions were felt across UK real estate, a market that is intrinsically global. Yet, the UK continues to exert its pull on international investors, attracted by the country’s safe-haven status and the property market’s capital growth prospects.
Indeed, Knight Frank’s 2021 Wealth Report predicts the UK to be a key recipient of real estate investment over the course of the year. Savills’ predictions for 2022 mirror this trend, with 47% of all investment to come expected to originate from international investors (of which just under half from neighbouring countries).
Further, EY’s 2021 UK Attractiveness Survey reveals the UK is perceived to be Europe’s most attractive destination for investment, with 41% of international investors planning to invest in the UK in the next 12 months. Respondents also perceived the UK to have the best COVID-19 recovery plan in Europe, with the rapid roll-out of the vaccine playing a key role in investors’ positive sentiment.
Despite London being a traditional gateway for international property investment, regional cities across the UK continue to emerge as investment hotspots. According to Savills, investment into the private rental sector in Manchester, Birmingham and Leeds combined topped £1 billion in 2020, up almost three times from the £361 million recorded in 2018; better yields and greater rates of capital growth are attracting new investors to the regional markets.
As the inoculation drive pushes ahead and the lifting of travel restrictions enable the release of pent-up demand among overseas investors, the market looks poised to recover its momentum.
Why overseas investors have never mattered more
While the return of international investors signals a new dawn in the UK economy’s economic recovery, it will also help fuel activity in the property market. Specifically, it offers the potential to help address the UK’s chronic housing shortage.
It is estimated that the Government needs to produce 340,000 new homes each year for the next decade to keep up with demand for property, accounting for new household formation and a backlog of the existing need for suitable housing. Despite this, and although housing has continued to emerge as an area of heated debate among political parties, successive governments have fallen short of the targets they set. In 2019/20, for example, the total housing stock in England increased by around 244,000 homes.
More often than not, reports of international investment flows into UK property carry negative connotations linked to the housing shortage. However, international investors can play an important role in supporting the construction and development sectors, by buying new residential units off-plan and funding development schemes, particularly at a time when the knock-on effects of the pandemic have contributed to the slowdown of construction.
For example, the finance raised from off-plan sales to overseas buyers, which are especially important for tower blocks and other high-density schemes, can contribute to the increasing supply of affordable housing. Overseas investment can also play a vital role in accelerating the completion of large-scale developments, which without international capital, may now have otherwise got off the ground.
It becomes essential, then, to harness this investment potential and direct it into the creation of homes. Now more than ever, as the world heals, and the UK opens up for business once again, it is time we acknowledge international investors’ place in the real estate ecosystem.