SA investors cashing in on Brexit
A weaker pound and softer house prices are prompting SA investors to take a fresh look at buy-to-let opportunities in the UK
A decade ago, just about every SA real estate agency was punting buy-to-let investments in the UK. British house prices had slumped in the aftermath of the 2007/2008 global financial crisis and the general view back then was that if you had R10m-plus to spare, there was no better time to invest in a posh pad in central London.
And that view was about right: if you’d bought residential property in popular Chelsea, Kensington or Mayfair in March 2009, you would have seen capital growth of a spectacular 75% within six years (see prime central London line on graph). Returns for SA buyers were, of course, further boosted by the rand’s 60% slide against the pound over the same period.
But in the past three years the UK property market has stalled on the back of Britain’s decision to leave the EU. The prime central London housing sector was hardest hit — prices have dropped 12% since the Brexit vote in mid-2016.
Buyer sentiment has been further dented by the introduction of higher stamp duties on upper-end housing sales. And in recent months house prices across the UK have come under increased pressure amid rising uncertainty about how Brexit will play out, given the looming October 31 deadline.
However, British estate agents have noted an uptick in sales in recent weeks, particularly from foreign investors seemingly keen to cash in on a weaker pound, together with softer house prices and record low mortgage rates before the UK finalises a potential Brexit deal.
UK online property group Rightmove has reported a 6% year-on-year rise in property sales in both July and August — the most significant summer increase since 2015.
Knight Frank, another leading UK property group, reports a 29% jump in the number of prospective buyers registering with the company in the first seven months of 2019. The biggest interest is in prime central London properties.
In Knight Frank’s latest report on the London housing market, the group’s head of international residential research, Kate Everett-Allen, ascribes the rise partly to the weaker pound, which has significantly increased the buying power of investors using offshore currencies. She says foreigners buying in US dollars, euros, Russian ruble or rands are now effectively paying at least 25% less for a prime central London property than they would have paid before the 2016 Brexit vote.
Young, working people can no longer afford to live in London, so there’s been a huge shift in rental demand to commuter areasChris Immelman
However, London is not the only UK city that should be on the radar of SA investors.
Chris Immelman, who heads Pam Golding Properties’ international division, believes there is far better value to be had in second-tier cities such as Birmingham and Manchester, as well as outlying "commuter belt" towns that offer easy rail access to London. These include Slough, Bicester and Bracknell, where the property group is marketing a number of new housing developments to SA buy-to-let investors.
Immelman says two-bedroom, two-bathroom apartments in these areas can still be bought for £250,000 (about R4.57m) — 50%-60% cheaper than you would typically pay in greater London. "Young, working people can no longer afford to live in London, so there’s been a huge shift in rental demand to these commuter areas," he says. "Large companies are also increasingly relocating their head offices from London to more affordable second-tier cities, which is supporting rental demand in Birmingham and Manchester in particular."
Two-bedroom units in these cities typically fetch gross rental returns (annual rental as a percentage of market value) of an attractive 5%-6%.
SA investors qualify for 50% gearing (mortgage loans) from various UK banks at an average interest rate of 3.5%. "If you put down a 50% deposit, your investment will be cash positive from day one," says Immelman.
What it means
Investors should look beyond London; second-tier cities such as Birmingham and Manchester may offer attractive returns
International real estate investment firm IP Global, which has offices in Cape Town and Joburg, also singles out Birmingham and Manchester as among the world’s top 15 residential property investment hotspots for 2020.
The company’s latest report on the global real estate outlook notes: "Birmingham is one of the UK’s fastest-growing economic hubs and home to the UK’s largest concentration of businesses outside of London."
According to IP Global, Birmingham house prices and rentals are forecast to grow by about 20% over the next four years, against an average 11%-12% for the UK as a whole. Similarly, Manchester, which is home to four universities and more than 100,000 students, has benefited from a significant amount of regeneration and investment over the past several years. House prices and rentals in the city are forecast to grow by about 15% over the next four years.
"With average house prices in the city just over a third of those in London, Manchester remains affordable," IP Global says.
Minister of economic development Ebrahim Patel struck a trade deal with the UK in early September 2019. The deal secures South Africa if Brexit goes ahead. It includes tariff-free exports of cars assembled in SA and tariff-free quotas on sugar, some canned goods and wine.