Post-Brexit - 2020 risk receding but an uncertain outlook
By Jason Penman
The finalisation of the election in favour of the Conservatives and the clarity on the direction of Brexit is largely considered to provide positive momentum for the property market in January. The release of pent up demand has been demonstrated by marquee deals completing soon after the decision
One aspect that affected the markets was the potential for a Labour manifesto to introduce significant change in relation to property. The uncertainty in this area is likely to have impacted appetite for investment and development as investors waited to understand the implications. There were proposals in relation to BTL and landlords, in the form of rent controls, open ended tenancies and binding minimum standards1. There were proposals to tax empty properties (empty for over 1 year) and stalled development projects. A promise of 150,000 affordable homes to be built each year (100,000 built by councils). The manifesto also included a proposal for a levy on overseas companies buying houses and a commitment to give local people ‘first dibs’ on new homes built in their area.
While the potential impact of these policies (for better or worse) is not clear, the finalisation of the election has reduced the potential for higher levels of Government intervention.
The prospect of Government changes in this area has not been removed completely, and there were a number of areas where both sides were looking to reform, I will highlight some of these below.
The outlook post the election and into 2020 is going to be heavily influenced by the usual drivers, market rates (interest and fx), government policy, supply & demand & affordability. In the paragraphs that follow I take a look at the latest updates in relation to market rates and the new governments potential policy proposals.
Rates – Interest rates remain at historic lows and recent commentary from the MPC committee hints of a trend lower than the current base rate of 0.75bp, with 2 of the 9 members voting for a cut to 0.50bp in Dec. Another member Gertjan Vlieghe recently indicated that he might join those voting to cut. While this is clearly supportive of the property market on affordability grounds keeping borrowing rates low, the underlying concerns on the economy driving this could long term pose a negative.
Source FT Markets - https://markets.ft.com/data/bonds
FX - A weak sterling provided opportunities for overseas investors prepared to run the risk of the uncertainty in relation to Brexit and political change. Assets were trading at significant discounts. The bounce in sterling once it became clear the Conservatives were likely to form a Government, while not as pronounced as a vote to remain was significant.
However by historic standards there is still a deep discount.
Source – Bank of England Spot Exchange Rates.
Government Policy – The Conservative manifesto while not as radical as the Labour version has some significant areas which could affect how investors and developers view the opportunity going forward.
The Government are committed to bringing forward a better deal for renters. Abolishing no fault evictions. They are in the process of assessing the results of a consultation on proposals to remove the assured shorthold tenancy regime. Section 21 notices (of the Housing Act 1988) can only be served under assured shorthold tenancies (the most common form of tenancy in the residential rental sector). They enable landlords to end tenancies through the correct issuance of a section 21 notice. Once this is abolished there is no longer any significant legal distinction between an assured shorthold tenancy and an assured tenancy. The parties will have he option of assured tenancies or assured fixed term tenancies. Both require landlords to gain possession through the courts.
In making this change he Government are proposing changing the rights to gain possession for legitimate means, such as where the landlord needs the property for a family member or to sell. Where sale is proposed the consultation is considering whether this is only after a 2 year rental period.
Clearly depending on the outcome of this legislation the attractiveness of BTL could be impacted. Existing assured shorthold tenancies will not be affected.
The Government is proposing a stamp duty surcharge on non UK resident buyers to help fund some of its investments. As mentioned earlier in this piece depending on the ultimate form of this change this could impact overseas investment.
It has extended Help to Buy from 2021 to 2023. It is also seeking to encourage a new market in 10 year fixed rate mortgages, and with long term yields at historic lows this could offer some attraction to buyers who have been put off in the past by the disparity between short term and long term interest rates.
In Summary - There are clearly a lot of moving parts post Brexit and the election and a lot of focus on housing. The fundamentals in terms of interest rates and demand remain strong. Government activity while not as intense as it could have been is likely to be significant. Uncertainty on economic performance post Brexit remains. Figures released recently reflect the most uncertain period in the run up to the election and it remains to be seen how additional certainty will feed into the performance of the economy.
The budget on March the 11th will be a key signpost on future policy. Until we have more information in 2020, the consensus predictions of a steady recovery post the slowdown through election uncertainly seem appropriate.
Investors and developers in the BTL space and parts of the market relying on overseas investment will be watching developments carefully. In both these sections of the market we have seen significant challenges already, with negative changes in relation to landlord tax arrangements and challenges in relation to liquidity in high end property (traditionally supported by overseas investment). In relation to high value units we have seen a general scale back of lenders willing to support these developments due to concerns on the market becoming less liquid. Further challenges in this space would likely mean these restrictions remain in place. Conversely the continuation of help to buy continues to support lower value unit developments.