On the 29th of March 2019, the UK will leave the EU. There are several key areas of concern across every sector of the country, but what does Brexit mean for UK property, and how is the market confronting the challenges?
In less than 12 months, the United Kingdom is scheduled to leave the European Union, following a hard-fought referendum back in June 2016. The negotiations are well underway, with progress being made on key issues, such as the duration and specifics of the transition period, citizens’ rights and future trade deals.
Despite the pervading uncertainty and cooling activity, investor confidence and growth projections for the UK’s property market remain strong, supported by dwindling supply and climbing demand.
2018 is the year when decisions on Brexit must be made, and property investors prepare to adjust to a new status-quo. But is the UK’s post-Brexit future still unclear, and what does it hold for those investing in UK property?
The country has been on something akin to a rollercoaster since Prime Minister Theresa May invoked Article 50 last March, serving the official notification letter to the European Council that formally began the withdrawal process.
Following this, there have been various summits, a gamble of a general election, and the agreement of a vital transition period - which will begin after the UK’s official departure in March 2019 - all aimed at solidifying the UK’s new status in Europe.
While uncertainty is set to dissipate in the final year of negotiations before the UK exits the EU, the property market, like many other industries, has held strong since the referendum in June 2016 – defying expectations.
Despite house prices and rental growth slowing in recent months, the significant falls in property values projected in the wake of the referendum have failed to materialise.
According to data from Your Move and LSL/Acadata, annual house price growth in February 2018 remains positive at a modest 0.6%, while data from the Office for National Statistics (ONS) found that rents increased by 1.1% annually over the same period.
But if Brexit is not behind the deceleration in growth, what is?
Fundamentally, house price and rent growth in the UK is governed by the imbalance between the supply and demand for properties, with this current slowdown forming a natural part of the property cycle.
As housebuilding construction activity remains subdued, owing to high materials costs and a chronic labour shortage, the supply of homes in the UK continues to fall far short of demand, pushing prices up in a competitive, high demand market.
Yet, this growth has started to cool as property becomes increasingly unaffordable for many prospective buyers. With the cost of purchasing a home too high, many households are turning from the housing market and towards the more reasonable rates available in the private rented sector.
As a result, home sellers are having to be more competitive with their prices in order to attract buyers, despite estate agents registering fewer homes for sale in February, which has caused a modest drag on asking prices.
Rental growth, on the other hand, has been significantly stronger due to increasing demand from those unable to buy, but national figures are being held back by London’s weaker lettings market, with annual growth reaching 1.6% when excluding the capital.
Despite coinciding with the aftermath of Brexit, it is this natural ebb and flow in demand and supply that has dictated the slowing of the property market in recent months. But with a conclusion to negotiations emerging on the horizon, projections point to far greater growth in the years ahead.
Whilst much has changed in the last year, the Prime Minister still faces several challenges, with some crucial legislation needed to bring greater clarity to Brexit.
One key area of concern for the housing markets is immigration.
A white paper, which is due to lay out the UK’s immigration system plans after Brexit, has been repeatedly delayed, originally slated for Summer 2017 and now not due until later in 2018.
A significant piece of legislation, it is essential that the Government maintains the UK as an attractive location for international workers, as a substantial number of key sectors rely on overseas labour.
This is especially true of the healthcare and construction industries, both of which have historically had strong international worker populations.
Each sector is facing a labour shortage, which makes confirmation of the UK’s immigration system even more important.
However, construction employment levels are down 15% on 2008 numbers, so whilst Brexit may be exacerbating the low number of EU workers, the trigger came nearly a decade earlier.
Similarly, a report by Knight Frank expects healthcare investments to reach record levels in 2018 despite its low staffing levels as a result of Brexit, owing to favourable demographic trends and an under provision of care beds in high demand areas.
The immigration system must also allow the UK to uphold its position as the top destination for international students, as a weakened Sterling is giving overseas students greater value for money.
With more money at their disposal, international students are more likely to opt for more expensive purpose-built student accommodation, which often provide modern fixtures and essential amenities that cater to today’s value-driven students.
As such, demand from international students supports the growth of student property rents, especially given the significant undersupply many local student markets are faced with.
Despite recent developments at the negotiating table, much remains unclear, and even after the details are finalised, MPs will still have a final vote on the Brexit deal.
Chancellor Philip Hammond’s Spring Budget announcement, that the UK economy’s better-than-expected growth of 1.7% in 2017, should provide a much-needed boost to the country’s position in the talks.
However, there is one thing we may yet be certain of; the housing market will continue to endure this uncertainty.
Both Savills and Knight Frank have predicted double-digit house price and rental growth over the next 5 years, making their forecasts in 2017 when the UK’s future was arguably at its most obscured.
The question is; why?
Once Brexit concludes, in whatever fashion it takes, the fundamentals of the property cycle – supply and demand – will continue to work unabated, with low levels of stock continuing to support house price growth.
Meanwhile, affordability pressures will drive up demand for private rented property, pushing up monthly rental rates.
Until the 29th of March 2019, the Prime Minister has her fair share of challenges in order to provide greater clarity and ensure a smooth start to the UK’s post-EU future.
Doing so will keep the country open for property investors all across the globe and send a message to the world that, despite Brexit uncertainty, its business as usual.
Investors in UK property have persistently demonstrated their ability to adapt to industry changes, and the housing market remains one of the key pillars of investment.
To keep up-to-date on the latest in-depth analysis of the performance of the property market, take a look at our free property investment guides.