Q&A: US Investment in the UK Property Market
The British residential property market has a long-standing reputation as a safe haven for foreign investors; one that can be relied upon to deliver steady capital growth even in the face of international economic upheaval.
Recent years have only added to this reputation. Despite the turbulence of Brexit, the Covid pandemic and the war in Ukraine, and despite a global climate of rising inflation and rising interest rates, UK property has continued to appreciate strongly. At the same time, rental values have risen sharply and yields in many regions have been excellent.
However, Britain is not the only country to have experienced strong capital growth. Across the whole of the EU, house prices have risen by an average of around +10.5% year-on-year, and some countries, such as the Czech Republic and Hungary, have seen price indices rise by over +20%. Across the Atlantic, homes in Canada gained more than +22% in value in 2021, and the rate this year is running at around +18.5%.
Without doubt, there is some impressive competition. However, the UK is still riding high in the international league tables for foreign investment in property and, in our own experience, enquiries from the United States have been rising particularly strongly. An obvious question then, is why this should be the case, so we took the opportunity to ask our Director, Michael Holliday.
Q. From the perspective of Residential Estates, is it fair to say that you’re seeing growing interest from American property investors?
A.
Yes, I think it is, although it’s not completely clear-cut. I say that because, to be fair, there’s always been a history of strong interest in British property on the part of US investors. The UK residential market has been on their radar for years, in much the same way as it’s been a popular choice amongst investors from Hong Kong, China, Russia and elsewhere.
That said, we have seen an upturn in US enquiries over the last 12 months, and to judge by media reports, the phenomenon isn’t just a short-term ‘blip’ or limited to our own clients. Towards the end of last year, ONS published figures showing that foreign ownership of British residential property had risen by around 180% since 2010. There are now almost 250,000 homes registered to overseas buyers. Of course, not all of those will be buy-to-lets; some will be second homes.
In our experience, American buyers have made up a significant proportion of those investors and it’s probably fair to say that they represent the single largest source of recent growth in terms of inbound enquiries and our international client base.
Q. Are you getting any sense of what’s behind that trend?
A.
I think that in the United States and elsewhere, people are asking themselves some hard questions about the way the global economy is going; the pressures, the difficulties and so on. High inflation and poor interest rates mean that putting money into savings accounts is usually a waste of time, and stocks and shares have been looking very shaky, too. Numerous markets in the EU and America have seen indices falling, so it all begs an obvious question about what investors can do to avoid any real-terms losses and, if possible, to achieve real-terms growth.
Many investors will have owned or managed portfolios that included an element of property – which is typically seen as one of the most secure asset classes – and I think that sort of conscious association (of property with security) is really driving people right now.
Q. Are there any obvious reasons for why they’re choosing the UK rather than any other property investment locations?
A.
Well, in some cases, they’re not making that sort of either/or choice. They’re certainly putting money into UK property but some of them might well be buying into other countries, too. Partly that will be to diversify their portfolios and to spread their risks.
On the other hand, there are plenty of others who are much more focused on Britain alone, but in all cases, we can see some pretty clear reasons why they’re including British property in their plans.
First, the strength of the dollar and the relative weakness of sterling certainly work in their favour. Dollars now buy much more in Britain than they did in 2016, so the exchange rate makes UK properties considerably more affordable.
Second, although the UK doesn’t have the world’s fastest rate of capital growth right now, it has shown itself to be a reliable long-term performer. If short-term gains were all that US investors were interested in, then they need look no further than their own country. House prices grew there by something like +17% over the course of 2021, and they’re averaging around +11.5% so far this year. (Different sources give different figures, of course, but there’s no doubt that values in the States have been rising strongly.) But serious investors are generally looking well beyond the short term, and in that respect, the UK’s track record has always looked impressive. It has proven itself to be a reliable market when it comes to property, typically delivering returns that have been well over the rate of inflation.
It’s true that inflation is exceptionally high in the UK at the moment, but it’s similarly high in many other countries. In any event, there are good reasons to believe the Bank of England when it says it expects to be able to get the Consumer Price Index back down to around 2% by 2024. Most forecasts for capital and rental growth are higher than that, so the combined returns for property investors should continue to translate into healthy real-terms profits.
Looking at how other countries’ property markets are going this summer, they’re generally showing signs of decline. High inflation often prompts rising interest rates, and that’s now a realistic prospect for the majority of developed nations. It’s very likely to slow price growth in the UK, but exactly the same thing is going to be happening in North America and Europe.
In terms of resilience, the UK is actually outperforming the trend, and that’s an important point to note. Most countries are now seeing slower rates of capital growth than they did in 2021 but, according to most sources, prices in the UK are rising faster than they were at the same time last year. Again, that makes the British market look more robust, dependable and attractive.
The other reason for the UK’s enduring appeal is the speed of domestic rental growth, which has been distinctly quick when compared to most parts of Europe. That’s not to suggest that the UK is the leader on this – America, for example, has witnessed faster growth, averaging perhaps +18% nationally and running considerably higher in some popular cities. But there is a concern about rising interest rates in America, the risks of a prolonged recession, and the ability of US citizens to keep paying such fast-rising rents. The clients we speak to seem to feel that it’s unsustainable; they sense diminishing prospects in the States so they’re looking for more secure prospects elsewhere.
Q. And they regard the UK as one of those more secure options?
A.
Yes, I think many of them do. For British people, who are subject to quite a lot of gloomy news and predictions in the media, it’s easy to misunderstand how the UK is seen from the outside. We’re a country that has withstood all sorts of economic shocks, and yet our property market has still been delivering record-breaking results. And despite all the political manoeuvrings going on in government, we’re still a comparatively stable, peaceful and secure democracy. That all weighs in our favour and a lot of foreign investors recognise that.
But it’s not just about security alone; it’s about total financial returns and the way investments are likely to perform in the future. Most reputable sources expect UK house price-growth to slow towards the end of this year and throughout 2023, but most medium-term forecasts suggest that values will still continue to rise. That’s quite a contrast with many other developed nations. Russia and China have already dropped into negative-growth territory according to some house price reports, and there’s an expectation that many more will do so in 2023. Property values in Canada, Australia, New Zealand and Japan are all tipped to fall below 0% next year, and there are lots of European countries that will probably see results that are only a little way above that.
There are some outliers, however. Residential values in India and Norway are tipped to exceed +3% growth in 2023, but those are two very different countries and capital growth is only one of many metrics when it comes to investment appeal. Factor in other things – like average per-capita incomes, inflation, average rental values, investment costs and yields – and the picture gets a lot more complicated. But on balance, looking at all the different criteria, Britain continues to look good, and that’s probably why we’re seeing rising interest from America and elsewhere.
Q. And are investors looking at any particular geographical area, or more generally at ‘UK residential property’ as a whole?
A.
There’s invariably a geographical focus and there are some obvious perennial favourites. London always gets a lot of attention, mainly based on its long-standing record. Historically, it’s been a popular destination for foreign investment in property, and there’s plenty of data to show that this popularity continues. I mentioned that there were something like a quarter of a million foreign-owned homes in Britain; well, around a third of those are in London. There are another 40,000 or so in the South East, and a little over 36,000 in the North West. Otherwise, there’s a pretty modest spread across the other regions.
That’s working from national data, of course. From our own perspective, we’re definitely seeing continued interest in London and the South Coast, which is probably what most people would expect. And similarly, there’s plenty of interest in Liverpool and Manchester. But increasingly, we’re getting some very well-informed professional investors and portfolio-holders asking us about places that you might not normally expect American investors to be thinking about. They include cities like Salford, Sheffield, Leeds and various towns and cities in the Midlands.
It seems that a lot of US investors are really doing their homework now; that they are digging quite deeply into UK property market data before making an enquiry. They are coming to us with ideas, selection criteria and shortlists that we might not have seen just two or three years ago.
Q. Are you seeing a particular focus in terms of property types?
A.
The interest seems to be very much on the higher-quality residential side, as opposed to, say, HMOs or student accommodation. There’s also a definite preference for more energy-efficient properties; new-builds or modern conversions that won’t quickly need to be upgraded to meet minimum EPC standards. But beneath those broad categories, there’s a real mix of interest; predominantly in conventional ASTs and holiday lets.
A lot depends on the location, obviously. Shorter-term lets in holiday hotspots can be very lucrative, especially since the pandemic, which boosted visitor numbers and stimulated substantial price growth. So we’re seeing that sort of interest in places like London and Manchester, in various resorts along the South Coast, and even in some fairly remote rural destinations in Cumbria and the Yorkshire Dales. These are all places that offer really credible potential for capital growth, coupled with excellent rental returns. We’ve seen holiday properties command record prices since 2020 and the ‘staycation’ trend has seen occupancy rates skyrocket.
But in other locations – including Yorkshire cities like Leeds, Sheffield and Halifax, or in places like Nottingham and Derby – the emphasis is more on longer-term ASTs. Here, investors are mainly interested in meeting rising demand on the part of relatively young professionals with jobs in the bigger towns and cities. Tenant demand is well proven, investment costs are a lot lower than in London or the South East, and consequently, the yields are generally very good.
Q. Do you want to conclude with any tips or advice for US investors who have an interest in British property?
A.
I think a lot of our American investor clients have already been doing the right things. They’re starting with a list of their personal investment priorities so that they can be clear in their own minds about what exactly they want their chosen investment to deliver. As part of that planning phase, they’ll also consider things like their attitude to risk and any personal preferences; for example, the type of properties they might consider: assured shorthold tenancies, conventional holiday lets, a serviced accommodation model or whatever.
Having done that, they’ll often then do some initial research of their own, basically just to narrow down the field. At that point, they’ll typically come to a UK-based agency like ourselves to make sure that they can take advantage of local knowledge and specialist in-country expertise. That’s really valuable and it can make a huge difference to the performance of the investment.
I’d certainly advise any investor to give thought to at least that first phase; to that basic examination of what you want to achieve and what your priorities are. When we talk with new customers for the first time, that’s a conversation we are always very keen to have because it shapes the direction of everyone’s thinking and any subsequent research. If you’re prioritising capital growth prospects, that might lead us in one direction; if you’re more focused on yields, then that might suggest some other choices.
Once we have a clear, shared understanding, that’s when we can apply all our knowledge of regional and local market conditions and provide the due-diligence support that is so essential to a profitable investment. There are some excellent opportunities within Britain’s very diverse property market and, in our experience, this approach is the best way to capitalise on them.
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