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So long, 2016: the year the pollsters failed to predict

UK Property investing in 2016
Jan 19, 2017

Last year was an eventful one for the UK, and proved the buoyancy of the UK Student Property and hospitality sectors, with highlights that included:

  • Sterling at a 30-year low against the dollar
  • UK economy ‘resilient’
  • Record UK student intake
  • Continuing shortfall in student accommodation
  • Increase in overseas visitors

Two events dominated 2016, both drawing gasps of disbelief from around the world – the UK’s Brexit referendum decision to leave the EU and the election of Donald Trump to be the next President of the United States.

Both outcomes led to a flurry of gloomy speculation about the future, both economic and social.

But, with that eventful year behind us, it’s fair to say that the sun still rises every day and most of the global population is just getting on with it.

 

What’s happening to the post-referendum economy?

Positive effects of Brexit

The UK is the first country ever to leave the EU, so there is no precedent for either side in the upcoming negotiations – which haven’t actually even started yet.

It is virtually impossible for the referendum result itself to be overturned, but legal wrangles about whether Article 50 (the start of two years of formal exit talks) can be triggered without reference to the House of Commons continued into December.

In the interim, sterling took a serious beating in the foreign exchange markets and fell to a 30-year low against the dollar and a three-year low against the euro.

The Bank of England announced a cut in interest rates to 0.25%, an all-time low, in an effort to boost the economy.

The Chancellor’s Autumn Statement

But the first real insight into the post-referendum economy came in November’s Autumn Statement.

In it, Britain’s new Chancellor of the Exchequer Philip Hammond described the UK economy as resilient. Key points included

  • The government’s target of clearing its deficit within this parliament has been put back, with a predicted shortfall in government finances of £122bn by 2020. A return to surplus as soon as possible thereafter is still the target
  • The UK debt to GDP ratio is expected to peak at 90.2% in 2017-18
  • The Office for Budget Responsibility (OBR) forecasts borrowing of £68.2bn this year, reducing to £20.7bn in 2020-21
  • The OBR’s growth forecast for 2016 has been upgraded to 2.1% (from 2.0%) and downgraded for 2017 to 1.4% (from 2.2%)
  • Corporation tax is to be cut to 17% – the lowest in the G20 – by 2020, while the income tax threshold will go up to £11,500 in April 2017
  • £23bn will be spent over the next five years on innovation and infrastructure
  • A £2.3bn fund will be set aside to provide 100,000 homes in high-demand areas, with an extra £1.4 bn to provide 40,000 new affordable homes. A further £1.7bn will speed up the building of new homes on public sector land
  • Employment is forecast to increase each year, with 500,000 new jobs created by 2020

Welcomed by business and industry

Optimistic business outlook

The response to the statement has been largely positive, given the post-referendum uncertainty and lack of precedent.

“Philip Hammond has delivered a responsible, solid and focused package that will reassure both business and markets.”

– Adam Marshall, Director General, British Chambers of Commerce

“The chancellor’s commitment to double annual capital spending on housing by 2020 demonstrates that he understands that house building and economic growth are intrinsically linked.

For every £1 invested in construction, £2.84 is generated in the wider economy and therefore the best way to protect ourselves from an economic wobble as we leave the EU is to invest in our built environment.”

– Sarah McMonagle, Director of External Affairs, Federation of Master Builders

“For real estate, the Autumn Statement’s forecast of continued jobs growth in the coming years is encouraging, as this should support occupier demand.

Plus the Chancellor has restated the government’s commitment to reduce corporation tax to 17%, which I believe will be a key advantage for the post-Brexit UK economy.

Some will make a great deal out of the UK debt to GDP ratio exceeding 90%, but that is still low compared to countries like Japan where it is over 200%”

– James Roberts, Chief Economist, Knight Frank

Unpredicted outcomes

At the time of the British result, many felt that the vote was an expression of frustration and anger at a complacent system; much the same was said of Donald Trump’s victory in the USA.

As for what the future holds, we’ve already seen the Italian Prime Minister resign after defeat in a constitutional referendum. There are elections this year in France, Germany and the Netherlands, and who’s to say that a platform of, for example, withdrawal from the EU might not strike a similar chord of voter discontent and disobedience to the opinion polls? 

 

UK property market set fair

Buoyant property market

Uncertainty in Europe might just work out rather well for the UK property market, especially Purpose Built Student Accommodation (PBSA) and Serviced Apartments.

September 2016 saw the start of an academic year with a record student intake of around 424,000 – 3% up on 2015, including an 11% increase in EU students.

But even if future legislation makes the UK less attractive to our continental cousins, we believe the impact on the student property sector will prove negligible.

History tells us that student numbers rise during times of recession and economic instability; rather than venture out into a fiercely competitive jobs market, people turn to university to prepare themselves better.

Our university towns are still desperately short of PBSA, with shortfall estimated at around 76%.

Investors find this ratio attractive – according to Savills, last year 74,500 purpose-built rooms were traded in the UK (of which 80% were existing stock) with a total value of £5.9bn – twice the previous two-year average.

And not only does the struggling pound offer excellent value to the overseas investor, it also encourages overseas visitors.

Significant rises have been reported in inbound flight bookings, particularly from the US and China, while Ryanair have noticed an increase in overseas traffic to regional UK hubs.

And, where there are visitors, there needs to be high-quality overnight accommodation.

The hospitality sector has been transformed by the sharing economy and peer recommendation; many visitors to the UK will be entirely familiar with the concept of Serviced Apartments, and in many cases it’s their preferred option.

Our luxury development in North Devon is proving a big hit with its guests, and they’ve been enthusiastic advocates of Westbeach on TripAdvisor.

Award winning serviced apartments investment

Opportunities in 2017

Knight Frank believes that the volatility we’ve seen in global investment markets in 2016 will continue.

“With equities and bonds set to see a rollercoaster ride, and fluctuations in currency values creating opportunities for those willing to invest across borders, prime real estate in safe haven markets will be in demand among investors.

In the global economy, there is now huge pressure on investors to ‘park’ money until stability returns, which is tearing up the rule book on pricing.”(James Roberts, Chief Economist, Knight Frank)

Which rather suggests that 2017 might be a very sensible year to explore countercyclical, Brexit-proof property investment opportunities such as PBSA and Serviced Apartments.

View our UK property investments

 

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