If nothing else, Q3 was something of a a wild ride. Interest rates are rising globally, sterling dropped to a record low against the dollar, and by the end of September, headlines of a potential global recession dominated headlines. While economic headwinds are undoubtedly challenging, they also present opportunities for anyone with liquidity or assets to raise capital against. Here's what we think we'll see this quarter regarding finance trends.
Prime UK Property: a Shift Towards a Buyers’ Market
The past two years have been a sellers' market in the UK as competition rose during the pandemic, fuelled by record-low interest rates and Rishi Sunak's stamp duty holiday announcement in 2020. Sellers had their pick of buyers, even for prime property purchases, with buyers sometimes having to put in offers well over the asking price to beat the competition. But as two-year fixed rates reach record highs, today’s buyers are more reserved; sellers are having to adjust their expectations and be more realistic in terms of pricing and demand than they have been in the past couple of years.
Despite economic volatility, UK property prices have continued to rise, with September figures showing a 0.7% increase in the value of new property coming onto the market. However, there are some signs the market is cooling, and the sharp increases in interest rates may well slow transaction volume as buyers become more hesitant to take on higher interest rate mortgage. However, as always, there are opportunities: demand for prime property in central remains robust despite some signs of cooling. Buy-to-let property investments remain popular, with prime London rental market prices increasing by 3.3% in Q3. Rental purchases are especially sought-after at the moment, given the exponential rental demand in London, rising yields and the possibility of using rental property as a hedge against inflation. We believe anyone purchasing buy-to-let property will naturally gravitate towards longer-term fixed rates in the current economic environment.
Registering UK Property Held In Offshore Corporate Entities
Any UK property owned via an offshore corporate entity will now need to be registered on the beneficial ownership with Companies House under The Economic Crime (Transparency and Enforcement) Act 2022.
How much – and even if – this affects demand for prime UK property remains to be seen. The requirement to register beneficial ownership has been on the cards for some time and was enforced in March of this year, so the regulations won't be a surprise for owners and potential buyers that will hold property via offshore companies.
For most individuals that hold UK property in an offshore corporate vehicle, the benefit of owning UK property in terms of return on investment is likely to far outway the downsides of the registration requirement, given owning property in this way tends to be implemented for the streamlined structuring of assets. The register will simply make it clearer who owns UK property – a requirement that many HNWI property owners understand in the context of a global shift towards a more transparent fiscal system, which is also nothing new.
Remortgaging
We are seeing significant demand for remortgaging in light of recent base rate hikes. Mortgage holders have largely understood that rates will only increase further. Many are moving quickly to secure the current rates, which can reasonably be expected to be more competitive this year than we'll see in 2023. The demand for remortgaging isn't only a consideration for those with variable rates or individuals with fixed rates coming to an end in the next six months. Mortgage holders with fixed rate packages that end in the next eighteen months are proactively looking at remortgaging options now. We are regularly running cost analysis for these clients to see if it is worth breaking a present mortgage and locking in current rates for a longer time (increasingly 5-year fixed rates) rather than waiting until their current fixed rate ends.
London Property Market: Key Takeaways
- We believe that prime buyers will naturally gravitate towards longer-term fixed rates in the current economic environment – some five-year fixed rates are now more competitive than two-year fixed rates
- Purchasers who will retain buying power regardless of the economy are likely to be increasingly strategic about when they enter the market – assessing any potential cooling of prices
- Demand for buy-to-let investments remains strong as rental yields increase and demand for rental property intensifies. International investors remain keen to buy rental property.
- The UK's beneficial owner register of property held in an offshore vehicle is likely to give some investors pause for thought but unlikely to create a concrete drop in demand.
Exchange Rate: Opportunities For USD Buyers
At the beginning of 2022, many people predicted an uptick in foreign buyers in the UK after a pause during COVID, which didn't materialise. As we look into quarter four, there has been plenty of speculation about the dollar potentially reaching parity with the pound later this year, but there hasn't been a marked increase in foreign nationals buying UK property - yet. With the US dollar now providing such immense buying power (buying a £10 million property in London a year ago would have cost $13.5 million, compared to $11.2 million at today's exchange rate), USD buyers will likely see an opportunity to purchase prime property in the UK to benefit from savings on the pound and invest in stable real estate assets.
Dollar buyers are, of course, not necessarily American nationals or residents. Wealthy families and individuals from LatAm to Asia and the Middle East have long held wealth in USD, given the strength and stability of the currency, so this may translate to an overall influx of foreign investment in the UK rather than simply an insurgence of US buyers.
While the US dollar's strength presents opportunities, we don't expect the current exchange rate to be indefinite. While the pound is unlikely to gain on the dollar in the short term, we can reasonably expect it to recover in the medium to long term. We think we will see dollar buyers assess opportunities over the coming months, intending to strategically enter and then exit the market at the ideal moment.
Exchange Rate: Key Takeaways
- The USD/GBP exchange rate is likely to see foreign buyers with USD wealth consider buying in London
- UK property investments represent a solid opportunity for USD buyers with concrete savings in terms of buying power compared to a year ago today
Private Debt and Alternative Lenders: Uptake
Property aside, we also expect to see an uptake in private debt lending. In volatile markets, banks tend to restrict lending to some degree as they look to reduce risk and balance their margins. It's not always possible to foresee exactly what this will look like ahead of time as lenders react to market challenges in different ways. However, it can be reduced availability of lending products, only lending to clients (corporate or individuals) that meet specific lending criteria or that have plain vanilla financing requirements, or a shift towards much larger loans, which can be more profitable for lenders.
Anytime bank lending is restricted, private debt becomes something of a natural alternative. Private debt comes in many different forms – peer-to-peer lending, bridging finance, development finance, corporate finance and other types of lending, for example. Private debt lending tends to be more accessible for anyone that can't access bank lending, given these lenders tend to have a more flexible approach to risk, can consider more unusual borrowers, and can consider lending scenarios banks can't. We expect to see borrowers understand more about the opportunities presented by private debt and more private debt lending volume in Q4 and into 2023.
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