The recovery in the United Kingdom's residential property markets is exceeding expectations. The growing urban population in London and major regional cities is pushing demand to ever greater heights, and investors the world over are eager to stake a claim now that property prices are back on the upswing.
Institutional investment totaled £2.4 billion (HKD 24.7 billion) in 2017, an increase of 15 percent over the previous year. This is only just below the record transaction levels seen in 2015, prior to the EU referendum vote that temporarily shook investor confidence. 2018 is set to be a record-breaking year for UK property investment, and this is largely thanks to sustained optimism from overseas buyers who supported the markets through those turbulent times.
Our research shows that foreign capital accounted for 54 percent of investment volumes last year. This came primarily from established investors in Europe, the Middle East and North America, although growing interest from Asia is also making significant contributions, with Hong Kong investors being the biggest spenders.
As in the rest of Europe, the greatest obstacle preventing the UK’s residential markets from achieving their full potential is the lack of available housing supply to meet demand. An active development pipeline is aiming to address this imbalance, leading to a record number of forward purchases being made as investors secure prices today for properties that will enter the highly competitive marketplace in the coming years.
Best performing cities
London received the lion's share of UK residential investment in 2017. Institutional investment volumes grew by 20 percent to reach almost £1 billion with a net yield of 3.75 percent on average.
Although it is only the fifth busiest investment market in Europe—after Berlin, Copenhagen, Stockholm and Paris—the UK capital is favored by Asian investors, whose confidence in the city following the Brexit vote has been borne out. Prices have been recovering across the capital this year, with prime Central London seeing an increase in transactions and consecutive rental gains in the first two quarters of 2018.
There's more to the UK than London, of course, and Asian investors are increasingly looking to regional powerhouse cities such as Greater Manchester and Sheffield in the north, Birmingham in the Midlands, and the Scottish capital Edinburgh, to expand their portfolios. A number of large-scale construction projects are also underway in smaller cities across the UK, which are set for rapid price growth over the next few years.
Overcoming the supply shortage
The lack of available housing stock is the most significant barrier to new investors entering the UK’s property markets. This affects prime Central London most severely, with opportunities too scarce or upfront costs too expensive for less experienced investors.
The landscape is evolving however, with an increasing focus on purpose-built developments targeted at institutional investors and landlords. With the majority of these projects currently in the construction phase, forward purchase deals now comprise the largest share of investment volumes across the UK and patient investors must wait for their properties to enter the market and start generating income.
More and more investors are also entering into joint partnerships to increase their buying power and gain access to larger assets. These investment strategies are expected to continue through 2018.
Outlook remains positive
Looking ahead to the next 12 months, the UK’s residential markets are expected to continue their trajectory of growth, fueled by ever-increasing interest from overseas property investors.
Our head of UK residential investment, Simon Scott, explains: “The growth in city populations, strong supply/demand fundamentals and relative economic stability provide many reasons for investors to remain positive about London and the wider UK in the next year.
“The impact of Brexit does not seem to have dampened investors' appetites and there is an increasing desire to gain exposure to the sector.”