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UK property market offers discounts for SA investors

Falling UK property prices and the strong rand are paving the way for discounted buy-to-let property investments.

This article was first published in the latest issue of the Moneyweb Investor. Click here to read the magazine in full, at no cost to your pocket.

The timing might be opportune for South Africans with money to blow on a humble buy-to-let apartment in UK cities such as Manchester and Liverpool, where properties are still comparatively undervalued.

Cape Town-based Lisa Bathurst, the director of international property advisory firm Hurst and Wills, said a stronger rand relative to the pound and softening property prices due to the UK’s decision to leave the European Union (known as Brexit) have made it possible for South Africans to make discount purchases. UK property, buy-to-let apartments,rand, pound, property prices,Brexit

Industry players are pointing to slower house prices due to the political uncertainty created by ongoing Brexit negotiations and a weak economic climate. Underscoring this is that house prices fell by 0.3% for the first time in six months in February, according to figures from UK-based mortgage lender Nationwide.

It expects house prices to rise by 1% in 2018, the slowest growth rate in five years.

Source: Nationwide

South Africans are motivated both by falling property prices and a strong rand against the pound. Over the last two years, the local currency has weakened by 28% against the pound.

Essentially, properties are nearly 30% cheaper than two years ago.

Hurst and Wills’ Bathurst said this discount is prompting SA buyers to rebase their investment decisions on value for money offered by the UK, which is widely considered as a traditional ‘safe haven’.

“Although Brexit is still to happen, the UK will come through. Over the past 15 to 20 years, the property market has been stable and sustainable. The property market has strongly recovered since the 2008 financial crisis,” she said.

Bathurst helps South Africans to purchase residential, industrial and commercial properties in the UK, linking them to property developers and sellers in the country.

She singles out the housing market for offering pockets of value.

The UK is facing a massive undersupply of housing, with the construction of homes running at only 30 000 a year –  well below levels of more than 50 000 seen in 2011 and 2012. Industry players estimate that the UK requires about 270 000 new affordable homes a year.  

Private developers are expected to plug the shortages.

For the housing opportunities available, South Africans can purchase a full title studio apartment (20m² to 25m²) for as little as R1.2 million (£75 000), which can be leased for student accommodation purposes. Hurst and Wills has partnered with student accommodation property developers that offer fully furnished apartments and are managed by a local property expert.

“We are attracted to student accommodation market as we think that’s where the growth is,” said Bathurst.

Along with shortages of quality housing, the student accommodation market has seen a growing number of students coming into the UK and enrolling at learning institutions.  The UK is also attracts a number of international students, particularly from India, Saudi Arabia, Nigeria, and China.

This essentially creates a demand for accommodation, especially when learning institutions can only accommodate a limited number of students on campus.

“These students expect quality accommodation; they don’t want to share or be in a dormitory style-accommodation. In some cities, they only have beds (units) for 30% of the students. There is a huge demand to build more student accommodation that is close to universities.”

Bathurst is particularly interested in northern UK cities like Manchester and Liverpool.

Both locations are seeing huge infrastructure investments after many years of neglect. In 2016, the government confirmed plans to build a £56 billion high-speed train, which will allow commuters to travel from Manchester to Central London in an hour, compared with the current two-hour journey. The high-speed train development is expected to be operational from 2026.

Chinese investors recently pledged £1 billion to refurbish Manchester Airport by 2023. Once the infrastructure projects are completed, other offices and retail developments are expected to follow, and surrounding properties might see an increase in their valuation.

Yields and returns

UK-based bank LendInvest named Manchester as the best buy-to-let area in England for rental yields – a key metric for measuring the rate of income a landlord can achieve from a property.

Buy-to-let investors are achieving an average gross rental yield (before excluding costs) of 5.55% (in pound terms) in December 2017, according to LendInvest. After converting to rand, the yield can amount to almost 20%. This is impressive compared to what landlords are achieving in South Africa – an average gross rental yield of between 6.5% and 9.3%.

Like with any investment class, investing in property is largely speculative. The investment case for the UK property market hinges on currency exchange rates, with the pound expected to be volatile in the next few months as Brexit negotiations continue.

Expect to pay taxes when diversifying in the UK, mainly a Stamp Duty Land Tax, equivalent to Transfer Duty tax in South Africa. This UK tax is levied on residential property purchases worth more than £125 000 (R2 million).

Other costs to be incurred are conveyancing costs, council tax on property (similar to municipality tax) and capital gains tax when selling a property.   

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