Insight: how will Brexit affect the UK property market?

4 December 2020 | Investment

As the clock ticks ever closer to the end of the transition period, and the start of post-Brexit Britain from January, there still remain a number of major questions. Not least what kind of trade deal we will leave with, if at all.

Face-to-face Brexit talks resumed last week, but there remains ‘significant divergences’ between the two sides, particularly concerning state aid and fishing rights.

It is likely the trade talks will go right to the wire, and may still not be completed before the transition period officially ends on December 31 2020.

But what impact will us leaving the EU have on the property investment market?

Challenges for construction and the housing industry

Property investors rely on the smooth construction and creation of new schemes and developments. For individual investors, this gives them homes to invest in, while for the increasing number of institutional investors operating in the UK property market – primarily in the rental sector through Build to Rent, purpose-built student accommodation, co-living and senior living – new schemes being delivered on-time and on-budget will make a big difference to the returns they receive and how quickly.

This sector, though, is facing a number of challenges as a result of Brexit. Covid, for example, has made the sourcing of raw materials – a problem even before the coronavirus hit as a consequence of Britain’s decision to leave the EU – an even greater issue.

But there could also be opportunities, especially surrounding planning.

“It was with much anticipation that the construction industry waited to find out exactly what was included in the new planning laws of July 2020,” Paul McFadyen, managing director of metals and workwear retailer metals4U, says.

“The changes announced by Robert Jenrick, the Housing Secretary, are focused on speeding up the processes that supply new homes to market, and helping breathe new life into town centres across England to meet rising private, domestic and commercial property needs.”

He says the changes are intended to fast-track and streamline the planning application process to allow businesses and domestic housing to expand without the need to relocate. The intention is to reduce the need for building on greenbelt land surrounding towns and villages while keeping economic communities strong and viable, helping retain jobs, and providing continuity for the local workforce, businesses and communities.

“Full planning applications will no longer be required to demolish unused buildings before rebuilding; these buildings can now be repurposed into housing, retail, or commercial concerns, with less bureaucracy, to bring new revenue quickly into the heart of towns and cities,” McFayden adds.

“Homeowners can also add up to two storeys to their existing homes to help transition the changing face of family life – this will be especially helpful to growing families and to help provide support and familiar surroundings for our ageing population.”

McFayden believes updating the planning permission system is well overdue, with the construction industry for years bemoaning the red tape that created a sticking point in terms of time, and finance, to get construction projects off the ground.

“The new system has attracted large investment from Westminster; £12 billion has been injected into the government’s affordable home programme, this is projected to underpin the building of 180,000 new homes,” McFayden explains.

“The government has also pledged to boost the Home Building Fund with £450 million to help give access to financial support to small developers – in real terms this is expected to assist the building of 7,200 new homes, and a further £400 million has been assigned to support the building of around 24,000 new homes through the Brownfield Land Fund to target housing provision in city areas such as Liverpool, Manchester, Tyne and Tees Valley, Sheffield, and the larger areas of West Yorkshire and the West Midlands.”

McFayden says this level of financial commitment to the construction industry ‘will definitely help’ safeguard the security of the industry, construction workers, and associated services and suppliers throughout the Brexit period and beyond.

“Access to products and services post-Brexit are a major factor in the future planning and security of construction,” he went on. “Details of how the UK will do business with the EU and global markets are beginning to emerge, however, Covid-19 is also heavily affecting the sourcing of raw materials, construction materials, and labour. It is the major contributing factor to the recession the UK is now facing.”

The best way to grow the construction industry through these trying times, he believes, is to invest ‘within our shores’ as highly as possible.

“By utilising the skills and products already held, or manufactured, within the UK we can support the UK economy while making a real difference at a grassroots level to the livelihoods of all the sectors and services that make up, and contribute to, the construction industry supply chain.”

He says we need to prioritise UK-based materials manufacturers and suppliers, as well as utilising the skills and talents of UK-based architects, surveyors, tradespeople, project managers and the entire collective of workers ‘that are instrumental in the success of all construction projects’.

As is well known, the UK construction industry currently relies heavily on migrant workers from other EU countries and the end of the free movement of labour post-Brexit will immediately lead to a skills shortage in some areas.

Attempts are afoot to try and offset this. For example, the Construction Industry Training Board (a public body sponsored by the Department for Education) recently published its Strategic Plan for 2021-2025, which focuses heavily on how the department is investing in training support for the construction industry to increase the opportunities and outcomes for trainees and existing workers.

“Although this will not necessarily solve the problems in the short-term, it offers hope for the longer-term success of building a skilled and innovative workforce post-Brexit,” McFayden says.

What’s more, much of the investment for larger infrastructure construction projects currently comes from the European Investment Fund and the European Investment Bank. This funding will end when we exit the EU and, at this present time, it’s unknown if the revenue the UK will save in EU membership fees will adequately plug this €7.8bn deficit.

“An educated guess would suggest not,” McFayden says, before adding. “There is no doubt that the construction industry will suffer in the wake of our exit from the EU – however, with a forward-facing positive attitude, a commitment to investing in UK-based suppliers and services from within the industry, the pledge of government investment, and an update to planning laws to remove some red tape, the future success of construction in the UK has much promise of a brighter tomorrow.”

Impact already priced in

According to Uma Raja, chief executive of high-end investment platform CapitalRise, the prime end of the property market has been much less affected by Brexit than other parts of the sector.

“Prime real estate is the most resilient sector of the property market, which has been proven over the decades,” she insists.

“Brexit itself doesn’t really have much of an impact on our business because it has already been priced into the market. When we lend against an asset, it is supported by an independent professional RICS valuation and these valuations have potential Brexit impact already factored in.”

However, she says the main impact that Brexit has had on the top end of the market is that it has created uncertainty, especially around the time of the Brexit deadlines last year. This reduced transaction speed as people paused on transactions.

It’s easy to forget, with all the Covid chaos we’ve had this year, just how much of an impact Brexit was having on our lives at the end of last year, with chronic uncertainty and deadlock until the December election gave the Tories an 80-seat majority and a mandate for their controversial ‘Get Brexit Done’ agenda.

That said, once the deadline passed, transaction speed then accelerated, Rajah says. “We expect to see a similar increase in transaction velocity as the uncertainty is removed,” she adds, with more clarity on Brexit either way now likely to be a month or so from happening.

“Unlike many businesses, we feel the impact of Covid has counteracted some of the potential risks of Brexit,” Rajah says. “The pandemic has reduced the potential interest rate risk. With the base-rate at an all-time low, the government has prioritised the supply and demand of housing which has subsequently stimulated market activity since the first lockdown lifted.”

She adds: “People have shifted their own priorities by placing real estate purchase ahead of other assets. Strong demand for property combined with low lending rates has seen an increase in property purchases, which is a testament to growth in the sector. Considering this, we believe prime property will remain a vibrant and lucrative asset class for both UK and international investors, regardless of Brexit.”

This post has originally been featured in Property Investor Today.