How to assess the macroeconomic risks of UK property investment

Why now is the time to invest in property UK

Property investment risk must be considered when devising your investment strategy. It will help you determine how much capital you commit, how much leveraging to use to grow your property portfolio and the real yield on your property investment capital.

Property investment risk balances reliability of earnings and security of capital. In general, lower risk equates to lower yields, and higher risk equates to higher yields.

There are two general areas of risk: microeconomic and macroeconomic. The microeconomic risk is the risk in the detail of your property investment: location, financing, property management, and so on. Macroeconomic risk is linked to the political and economic environment.

In this article, you’ll learn about the macroeconomic risks associated with property investment and how they may affect property values and rental prices.

The country you choose for property investment

The country where you invest is the biggest locational decision you make, yet probably the least analysed. A country that benefits from low inflation, decent economic growth and stable politics provides the best backdrop for property investment.

The way to evaluate a country’s risk is by referencing its credit rating. Agencies such as Standard & Poor’s and Fitch research economic and political factors which affect perceived country risk, and rate countries accordingly. Another company that rates countries for their resilience for business and investment are FM Global. It calculates country risk on a range of factors, including:

  • GDP
  • Political risk
  • Oil vulnerability
  • Exposure to natural hazards
  • Supply chain
  • Control of corruption
  • Infrastructure

The United Kingdom is consistently ranked in the top 20 in the FM Global Resilience Index. The top 20 includes other countries such as Switzerland, Norway, the United States and Germany. Countries are scored out of 100, and the United Kingdom’s resilience score in the current index is 84.4. At the bottom of the list is Haiti (with a score of 0). Other countries with poor resilience include Ukraine, Pakistan, Jamaica and Iran.

The main macroeconomic factors

There are several macroeconomic factors which you should consider when deciding where to invest in property. Here we consider the main ones:

·         Inflation

The lowest risk is found in countries that have low and stable inflation (under 5%). Rental rates are reviewed annually. When inflation is out of control, price rises can negatively impact a property investor’s costs on a monthly basis. The investor is left out of pocket by rising costs that he can only attempt to recoup annually.

To combat this, property investors in countries that suffer high inflation rates will often raise their rents at more frequent intervals.

Inflation also affects the wider economy. High and unacceptable inflation affects the currency, international trade, and business and consumer confidence.

The least inflation-sensitive property investment asset is buy-to-let residential property, while industrial and commercial real estate is most sensitive.

·         Currency

A highly volatile currency can unbalance a country’s economy. It is especially true of those countries that rely on importing the commodities they need. BRICS countries (Brazil, Russia, India, China, South Africa) are particularly vulnerable. Political instability is a factor in currency fluctuation, as is the general economy. Most at risk are those countries that see regular currency fluctuations of 20% and more.

While the UK’s currency fell by around 15% or so after the EU Referendum, it has since stabilised at a more competitive level. It has had two major effects:

  • The lower currency (combined with, the higher oil price) has pushed inflation above 2% for the first time in several years.
  • Investment property has become even better value in the currencies of foreign investors.

·         Population growth

When a country’s population falls, it usually has a negative impact on property prices. This effect can also be seen on a more localised basis. A growing population adds to demand for homes, and this demand translates into higher property values.

In the UK, the population is forecast to continue to grow for several decades. The number of households that are renting is expected to grow from the current 5.3 million to more than 7.4 million as soon as 2025 (according to PwC analysis). It is likely to put upward pressure on rental prices, too.

·         Politics

Unstable politics lead to unstable property markets. It is both a case of perception and reality. Stable government tends to produce stable policies, while a change in government tends to be accompanied by a volte-face in economic policies.

The impending general election in the UK looks likely to produce the most stable political environment the country has witnessed since 2010. It should cement the Conservative government’s ability to negotiate Brexit, and the next general election will not be held until 2022. If Brexit negotiations go well, it could be that the Conservatives win in the 2022 general election, too – ushering in a total of 12 years of unbroken Conservative rule.

As a side note, PwC has forecast that the UK is likely to be the fastest growing of the G7 nations between its EU exit and 2050.

·         Tax and law changes

Property tax changes that have taken place in the UK over the last couple of years have placed an extra burden on property investors. There are ways that you can get around the tax changes. The important thing to remember is that while tax law applies to all, how it applies to you is an individual consideration.

On a brighter note, it is now likely that there will be no further tax hits on property investment in the UK. Furthermore, if the Conservatives do win the general election, it is probable that reductions in corporation tax and possibly even VAT may follow (perhaps after Brexit). Other political parties have also said they will increase income tax, a policy with which the Conservatives do not agree.

In summary, the UK is one of the most stable and economically active countries in the world. Even the vote for Brexit has not dented this. The fall in the pound has created an environment in which UK property is even better value for foreign investors.

Recently, the pound has shown some strength. The currency could further strengthen after the general election. Foreign investors who are considering property investment in the UK may never have a more advantageous time to buy than now.

Contact one of our team today on +44 (0)207 923 6100, and we’ll make sure you receive early notification of the best property investment opportunities as they are first made available, and before they are made public.

Live with passion

Brett Alegre-Wood

Brett Alegre-Wood
May 27, 2017


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