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Will dwindling EU investment damage the UK property market?

31 October 2017, 18:42 CET

While Brexit negotiations may have stalled in recent times, the immediate future of EU nations living in the UK has at least been assured. More than 80% of the 3.6 million EU citizens currently residing in the UK will officially have the right to stay once Brexit negotiations have been concluded, while the remainder will be granted amnesty while their long-term futures are determined.

City of London

For EU nations who still reside on the continent, however, the idea of investing in UK (and particularly London) real estate has become far less appealing in recent times. But what is the future for EU property investors in the UK, and will Britain's real estate market be adversely effected?

London property prices fall, but is Brexit to blame?

In the immediate aftermath of the Brexit vote, property prices in the capital fell suddenly. This trend was replicated throughout the UK, as nervous owners slashed their valuations in a bid to incentivise demand and avoid the threat of negative equity.

In fact, the number of discounts applied to property prices surged by 163% in the two weeks following the referendum, and while the market has since consolidated to some degree it has failed to attain the levels of growth that existed prior to the vote.

These incentives have therefore failed to achieve their objectives, with property prices across the board in London having recently fallen for the first time since 2009. The average price of a home in the capital fell slightly to £471,761 in the capital, while the nationwide figure declined to a little over £210,000.

While circumstances make it tempting to blame this on Brexit and the falling demand among EU nationals and European property investors, this is not a perspective shared by the BoE (Bank of England). In fact, the decline in pricing is thought to be largely the result of slow wage growth and rising inflation, which has squeezed disposable income levels in the UK, lowered demand and forced vendors to lower the price expectations when listing their homes.

Why overseas investment may increase post-Brexit

Far from triggering a decline in international investment, Brexit may actually see more global (and even EU-based) property developers spend their capital in the UK. There has certainly been an influx of activity in this market since the referendum vote, with London obviously commanding the vast majority of this interest. The demand in affluent, non-EU regions such as China, the U.S. and the Middle East has been particularly pronounced, as investors have sought to leverage falling prices and diminishing demand to their financial advantage.

Interestingly, property investors in Spain and Italy have also ramped up their search for bargain properties in the UK, while also capitalising on the devaluation of the pound and this currencies restrictions within a narrow trading range. This has created a favourable and extremely competitive exchange rate for EU buyers, while the rising demand in European states suggests that the future for the UK's economy and property may not be as bleak as some are reporting (particularly if an amicable exit deal can be reached).

The bottom line: A brighter future for the UK property market?

With these points in mind, UK property agencies such as Hatched should continue to welcome buyers both in the form of reassured EU nationals and real estate investors based on the continent. With the cost of UK homes falling and the level of domestic demand being restricted by Brexit uncertainty, EU investors and citizens have a unique opportunity to secure bargain properties in affluent areas and create a lucrative, long-term asset base.

Ultimately, much will depend on the performance of the macro economy in the UK and the impact that this has on UK property over a sustained period of time. If inflation continues to rise at a disproportionate rate to earnings, for example, and the BoE increases the base interest rate from 0.25% next week (increasing the cost of borrowing and potentially deterring more domestic buyers), the market could yet enter a cycle of decline that deters even the most deterministic investors.

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