Real Estate is one of the significant components of any economy, it's something which not only involves buying and selling of property, but it also includes a diverse field of activities, viz; planning, financing, construction, facility management, goods transportation, consultation and many other indirect services. Real Estate contributes a significant chunk of any GDP and plays a vital role in shaping up any economy. More broadly, it can be said that if the economy is showing a sluggish trend, the real estate segment will follow the same and vice-versa, if the industry is in bad shape it will ultimately be impacting the whole economy.
Real Estate buying and rental prices have a direct impact on the economy that's why not only the owners and buyers, but the central banks too, closely follows the patterns of rents and property prices. Central banks across the globe, while playing a balancing act in controlling the inflation and managing the interest rates, closely monitor the Real Estate market. While inflation doesn't have a direct correlation with the Real Estate, the interest rates directly impact the housing activity, as a low-interest rate scenario leads to increased interest in Real Estate, consequently increasing the demand. On the other hand, a high-interest rate scenario adversely impacts the buying affordability with increased home prices. There is an established relationship between economic stability and capital flows to the industry. In various economies, banks apart from lending to the real Estate rely on real estate collateral to reduce the risk of their lending. The Bank of England (BoE) in a historic decision had announced a rate hike in August last year, which led its benchmark lending rates at 0.75%, its highest level since March 2009.
Not only the central banks, policy changes and framing of new rules and regulations by the government, too have a substantial influence on property demand and prices. If the government implements some legislative changes like modification in tax laws and credits or tinkers the subsidies, etc., it impacts the housing demand helping in defining a temporary trend for the real estate market.
If we talk about the demand side of the Real Estate, demographics plays the most vital role, it constitutes the different essential factors like age, race, income, migration pattern etc., these are the factors deciding price and demand of real Estate, any significant change in demographics have a deep-rooted impact on the real estate trend of the economy.
UK's Real Estate market is one of the biggest in the European Union, out of the Commercial properties' total contribution of 385 billion euros to the EU economy two years back, UK's share of commercial real estate market was around 250 billion euros.
The UK housing prices had witnessed a dramatic uptrend before it finally started showing signs of exhaustion. Foreign buyers to first-time buyers all were snapping up UK property with hopes of high appreciation. The prices rose mainly on the back of factors like the immigration and population growth, record low level of Interest rates, low level of construction activities and rise in demand, specifically in the London area. But the housing market started witnessing a gradual declining trend in the last some time, with the overpriced market showing the correction. The slowdown in the South and East part of England mainly led to the weakness in the UK's house price growth. Buyers during the period started reconsidering high-risk property amid rising interest rates and tight mortgage affordability rules. With the exception of London, where the impact was comparatively benign despite a decline, the number of housing transactions has stuck at the same level for almost the last four years.
UK's house prices remained subdued in June, coming to its slowest since February, although the mortgages approval for house purchase remained broadly stable, consumer confidence remained relatively subdued. As per the Nationwide House Price Index, house prices rose by just 0.5 per cent during the month as compared to the same period last year, marking a seventh consecutive month of it remaining below 1 per cent mark. Slackening demand for both first-time buyers and home movers was visible, with lending remaining subdued and affordability constraints continuing to bear down on consumer demand for new loans.
UK's reals estate market since long had remained attractive for the foreign investors, given the increasing population of the country, its limited landmass and the strong rule of law. But with the looming Brexit and recent tax and lending rules enforced by the government, there has been a sense of uncertainty among the foreign investors. Brexit could be called the major dampener for the investment for the foreign investors in the sector, damaging the reputation of property investment in the country. There is a sense of nervousness among foreign investors about their investment in the UK after the Brexit vote.
Chinese investment, which constitutes a major chunk of FDI in UK's Real Estate, despite the fear of decline on account of Brexit has been rising after the vote, though it mainly can be attributed to depreciating British pound against the yuan, offering an investment diversification opportunity should the yuan be devalued in future. Persistence in Chinese investors' interest in UK's property market is not only because of rising house prices and rental income but also provides an opportunity to have a second home in the major areas of the UK like Manchester and Birmingham apart from London. From the Chinese companies' point of view, the UK's attractiveness is with global ambitions, as it is one of the major international financial centre and the world's biggest foreign exchange trading hub.
The UK's capital gains tax (CGT) rule for non-residents went through a significant change in April this year, when it was subjected to include UK commercial property as well as indirect disposals of UK real estate. Accordingly, all disposals done by the non-resident individuals, trustees and partnerships were made chargeable to CGT, while the non-resident companies had been subjected to corporation tax.
Not only the CGT, but there was also an increase in Annual Tax on Enveloped Dwellings (ATED), a charge mainly payable by companies owning residential property in the UK valued at £500,000 or above. The dwelling charge is applicable for all UK residential properties valued above specific amounts and owned wholly or partly by the onshore and offshore corporate entities, including companies, partnerships with corporate members, or other collective investment vehicles, such as unit trusts or open-ended investment companies.
Stamp duty hike too became a major dampener for the housing market activities over the years. There has been a continuous rise in stamp duty, like in 2010 a new 5% Stamp Duty rate was introduced on homes over £1 million, while in 2012, 6% Stamp Duty was introduced on homes over £2 million. In 2014, stamp duty structure was changed entirely, and rates were raised significantly on each band. As per the new structure, stamp duty was started being calculated by cumulatively adding the rate on each bracket, instead of being payable on the entire price. Further, in 2016, stamp duty rates on buy-to-let transactions witnessed a significant hike, a new stamp duty surcharge of 3% on top of the current Stamp Duty Land Tax (SDLT) was imposed making the situation worse for the home buyers.
From over 100 real estate companies trading on London Stock Exchange, if we look at some of the major construction and real Estate companies like, Breedon Group Plc, CRH Plc, Kier Group, JHD James Halstead Plc, all either declined in the last three years or remained at the same level. Though, there were few exceptions as well like, Marshalls Plc, Ibstock Plc, which not only outperformed their peers but surged to new highs in the last three years.
The UK's real estate market situation is likely to remain cautious going further, because of the Brexit development and with apprehension running high of further weakness in returns and capital values. Even if there is no- deal Brexit, the valuations are likely to fall substantially. The political uncertainty seems to have tempered the activity of buyers and sellers and the situation is expected to continue, with price growth and transaction levels not showing any sign of recovery anytime soon. Fear of price drop in the no-deal scenario has been making the buyers worried.
If the Brexit happens, UK will have to leave the EU single market, ending all the duty-free trade between other members. Real Estate market is likely to get an additional boost with the improvement in labour market conditions and low borrowing costs. The foreign investors too are not showing complete reluctance. Instead, they are seeking areas that will have their investments secure along with the highest possible return.
With Bank of England reducing the interest rates to a historic low level, the spotlight is back on diverse investment opportunities.
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