Landlord News

Why Brexit Doesn’t Matter, by Nova Financial’s Paul Mahoney

Rose Jinks - November 1, 2018

By Paul Mahoney, the Managing Director of Nova Financial Group

Brexit is a fairly common question that we get with regards with how it’s going to affect the UK property market. We believe that, in the right circumstances, there are a range of areas that supersede Brexit, or will be in place regardless of Brexit.

Firstly, supply versus demand.

When you look at the UK property market, the Government says there’s a requirement for 300,000 new properties per annum. The average supply per annum over the past ten years has been 150,000, so we’re only supplying around half the actual required supply, which is obviously driven by demand.

That is even further accentuated in major cities around the UK. That’s where the major shortages really are focused. Cities like London, Manchester, Birmingham, Liverpool and Leeds. Areas where there is very strong demand and growing demand, and the supply simply can’t catch up. That’s due to a range of different factors, such as simply not building enough, due to not enough funding to build, but also the fact that land is a limited commodity in those areas. It’s a lot easier to build in more rural and regional areas where there’s a lot of land, whereas, in city centre locations, land is more expensive; it’s more difficult to get sites to build substantial developments.

While we’re supplying half of the required supply, it’s very, very difficult to argue against prices continuing to increase, certainly over the mid to long-term. Markets will be cyclical, so they will go up and down, but, when there’s double the amount of demand versus supply in the market, the prices will continue to rise.

Another important point is focusing on micro markets as opposed to macro markets.

Why Brexit Doesn't Matter, by Nova Financial's Paul Mahoney

Why Brexit Doesn’t Matter, by Nova Financial’s Paul Mahoney

If you were to talk about the UK property market as a whole, and the impact Brexit might have on that, it’s easy to think that it could potentially have a negative impact, due to potentially the UK being less attractive to new people and a range of other things. When you narrow that down to micro markets though, in specific locations, for example, the Midlands and the North West, which is where we’ve been focusing as of late, those cities are driven by a whole range of factors and key fundamentals that are very much regardless of Brexit.

Things like the internal net migration of the UK; a lot of people moving from the south to the Midlands or North West, because those areas are a lot more affordable. A key demographic of that is young professionals, who are struggling to afford to live a comfortable life in London. They can go to somewhere like Manchester, earn a very similar amount of money, but live a much more comfortable lifestyle, because property prices are a lot cheaper, living expenses are a lot cheaper, so it makes sense for that sort of person to relocate.

Other key fundamentals are serious infrastructure spending.

Billions of pounds being spent in each of those cities on infrastructure, facilities and amenities. Other areas, such as economic growth and job growth, for example, Liverpool, where job growth just last year was nearly 40%, which is really incredible. All the key fundamentals that make a strong and stable property market really exist in those cities, and most of those points will continue to be in place regardless of Brexit.

Also, when you look at the risk mitigation factors if investing in central locations.

Central locations tend to be the focal point for depth in the market. Depth being the size of tenant pools and the demand from tenants for certain types of properties. Diversity in employment and various industries. The main reason most of us live where we live, generally, is to be relatively close to work. Each of these points exist in abundance the most of those in central locations. It tends to result in strong demand, regardless of the state of the economy. If Brexit were to cause a recession in the UK, you can still be quite confident that, in the centre of major cities, there’s still going to be strong rental demand.

Although the price of your property might fall slightly, that doesn’t really matter so much, as long as you’re not looking to sell or remortgage in that timeframe. So long as your property is rented, you’re safe. You can sustain your property or your portfolio so long as they are strongly rented. Quite often, what you’ll find in a recession, rents even tend to rise in central locations, because there’s less funding in the market for purchasing, and people in more regional areas often lose their jobs and flock to where the jobs are, being central locations.

Another key point to consider is that Brexit falls into the category of economic and political blips.

They’re speed bumps that are created by short-term changes, whereas properties are a long-term investment and, if you look at any of the major financial crises that we’ve had, or any changes politically or economically over the years, they have caused little speed bumps, but, overall, the property market has been very strong and resilient. If you are investing for the mid to long-term, you can have confidence that, regardless of what any economic or political changes in the short-term might make, over the long-term, you can have confidence in doing well.

If we’re positioning ourselves in the best possible way for mitigating the risks, by investing in areas where there’s very strong rental demand and areas where we have those key fundamentals, that will result in a strong property market, regardless of what Brexit is. Remember that nobody actually knows what Brexit is yet. To be worried about something that isn’t even defined is a little bit silly. Regardless of the outcome or what happens from Brexit, if we are positioning ourselves well and mitigating the risk, we can still have confidence in doing very well.