Capability Brown

How will Brexit affect UK property prices?

Our February Ask the Investment Team client call focused on the UK property market and the potential effects of Brexit. Topics covered included:

  • What effect Brexit might have on property values
  • Where to look for yield in property outside of London
  • Whether banks are going to withdraw from the UK and what effect this may have on residential and commercial property
  • The lending and mortgage options for Coutts clients

The expert opinions of Alan Higgins, Head of Portfolio Management and Construction and James Clarry, Head of Lending and Capital Management from Coutts were supplemented by the participation of Jonathan Hopper, a Managing Director from property search specialists Garrington. Garrington is one of Coutts keys partners when helping clients source properties to live in or for investment and was able to share his insights with clients. The call was hosted by Coutts Head of Client Investment Management and Wealth Services, Paul Sarosy.

The main points from the discussion are summarised below.

Don’t miss out on our next Ask the Investment Team call in March. Contact your wealth manager or personal banker to find out how you can dial in and put your own questions to the investment team. 

We are trying to decide whether to buy a family home in London now or whether to wait until later on in the year, given Brexit and the other factors that may play into the pricing? 

Jonathan Hopper: We’re going to have some volatility in the next couple of years, and the question for any buyer is ‘if I buy this property today could I buy it cheaper tomorrow?’ I think ultimately you have got to look at things on a case by case basis. Obviously we’re living in quite an unpredictable world at the moment, but on a case-by-case basis if you find the right property at the right price at the moment, as a long-term hold I think it does make a lot of sense to be looking while there are fewer buyers around.

James Clarry: I’d just add that it is – and has been for sometime – a very good market to borrow, and at the moment you can get extremely competitive rates on long-term borrowing. We can see mortgage rates rising at some stage in the future, so it is a good time to be borrowing.

What are the leading indicators that sustain a positive point of view towards London being a robust investment in real estate?

Alan Higgins: It all comes down to the economy. So if we’re talking about commercial, and to a certain extent residential, it comes down to how strong is the economy. And leading indicators for the global economy look very strong right now. And also, the share of transactions from overseas buyers in commercial property is at a record high. So, for me those are the leading indicators – the fact that the economy’s strong and that overseas investors have strong demand.

What worries me, however, is over-supply in new build. Jonathan, do you think that over-supply could bring the whole market down?

Jonathan Hopper: No, I don’t think it’s going to bring the whole London market down right now. What we’re seeing at the moment is a flight to value-led markets – so, Outer London is busier than Inner London at the moment.

People looking for yield are looking in new locations and that’s driving price growth and rental growth in parts of London that have been in the shadows for many years. Yield-driven buyers are also looking in new locations. We’re seeing more international demand for areas like Bristol, Manchester and further out, Cambridge and Oxford because there you can see yields north of 5%.

But in terms of new build in London, I don’t think it’s going to bring the whole market down.

Paul Sarosy: What are the yields on residential property in London just now?

Jonathan Hopper: They’re not spectacular at the moment, purely because London got ahead of itself over the last five years. Price-earnings ratios are 14% at the moment, so there’s an affordability issue there, and rents have not kept pace with price growth. A typical London average yield is 3-4%, but that’s going to vary according to location and type of property.

With Brexit coming up there is talk in the banking sector of people being moved out of London. When are we likely to see this impact London property prices? 

Alan Higgins: One point I would make is that I think it’s over-blown just how many banking jobs we will lose. For example, in the last week Paris was courting JP Morgan and Goldman Sachs and they both told the French government quite firmly that France would have to change all its labour laws completely before any significant numbers of Goldman or JP Morgan employees go to Paris. No doubt there will be some leakage, but the UK still has some advantages.

When we look at commercial property we are seeing slightly higher yields in the office market. For example the Facebook building in Marylebone traded at a 4.25% yield, just up slightly from 4%, so markets are pricing that in a little bit. But I would be a bit more optimistic on the number of bankers staying in London.

Jonathan Hopper: I think it’s caused concern in the market, undoubtedly, but the reality compared to the perception is very different. There will be some softening, but unlike last year when we saw the referendum result, that was a shock event and we saw the consequences of that. Article 50’s not a shock event now and it’s arguably been priced-in to some of the price reductions that we’ve seen recently. It maybe presents an opportunity rather than a threat for a buyer who’s willing to take a long-term view and isn’t 100% reliant on that sector of the market place.

What are Coutts lending criteria for buy-to-let?

James Clarry:  There are three considerations here.

First, loan to value. For properties up to £2m it’s 70%, for £2m-£5m, 65% and for property above £5m, it’s 60%. 83% of our mortgage portfolio is interest only, and LTVs are typically 10% lower for interest only. We have an appetite for higher LTVs for certain clients, however, based on what sort of relationship we have with them and on affordability on a higher level.

The second consideration is the interest cover ratio. We would look at 135% of net rental income, but again if the application doesn’t meet that test on a standalone basis then we can be flexible and adaptable depending on our clients’ personal circumstances. So, for example, personal income can be used to supplement rental income in certain circumstances.

Finally, we would consider the point where buy-to-let turns into commercial real estate. We don’t just have a personal business, we also have a very strong commercial business supporting our clients with their commercial interests. This covers clients with more than four properties - who would be treated as property professionals by the Prudential Regulation Authority, with the extra bit of regulation that entails – and clients with more than 15 properties or more £10m in debt, who can avail themselves of the expertise of our dedicated commercial property team.

IMPORTANT INFORMATION

This webpage is produced by Coutts for information purposes only and for the sole use of the recipient and may not be reproduced in part or full without the prior permission of Coutts.

The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

Past performance should not be taken as a guide to future performance.

In the case of some investments, they may be illiquid and there may be no recognised market for them and it may therefore be difficult for you to deal in them or obtain reliable information about their value or the extent of the risks to which they are exposed. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. Investments in emerging markets are subject to certain special risks, which include, for example, a certain degree of political instability, relatively unpredictable financial market trends and economic growth patterns, a financial market that is still in the development stage and a weak economy.

The information in this webpage is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. Nothing in this material constitutes investment, legal, credit, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you.

The information in this webpage is believed to be correct but cannot be guaranteed. Any opinion or forecast constitutes our judgment as at the date of issue and is subject to change without notice. The analysis contained in this document has been procured, and may have been acted upon, by Coutts and connected companies for their own purposes, and the results are being made available to you on this understanding. To the extent permitted by law and without being inconsistent with any applicable regulation, neither Coutts nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such information, opinions and analysis.

This document has been produced by Financial Advice & Investment Solutions at Coutts and does not constitute investment research. Neither this document nor any copy thereof may be sent to or taken into the United States or distributed in the United States or to a US person. In certain other jurisdictions, the distribution may be restricted by local law or regulation.

Wealth division of Royal Bank of Scotland Group.

Coutts & Co. Registered in England No. 36695. Registered office 440 Strand, London WC2R 0QS. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Become a client

When you become a client of Coutts, you will be part of an exclusive network.

BAC_link_mobile
Read more »
  • Pulling The Trigger On The Brexit Starting Pistol

    • Coutts Investments
    • Insight
    • Economy
    24 Mar 2017
  • Trump's Trillion-Dollar Promise

    • Investments
    • Insight
    • Coutts Investments
    22 Mar 2017
    Trump's Trillion-Dollar Promise Coutts examines President Trump’s $1 trillion infrastructure plans and doubts over whether the funding will materialise.
  • Special Member Events With Coutts Concierge

    • Cards
    • Coutts Banking
    • Insight
    • Banking
    21 Mar 2017
    Coutts Concierge luxury hotel collection Every month, Coutts Concierge collaborates with cutting edge fashion houses, world-renowned art galleries, luxury food and drink brands, five-star hotels and Michelin-starred restaurants to bring Coutts Silk cardholders a varied programme of member events