After facing a ‘perfect storm’ for the last nine months, the UK’s real estate market is now radiating optimism again.
Improving buyer inquiries, and lower-than-anticipated interest and mortgage rates had made the real estate market see some hope to recover in the coming months after a stagnant start to the year, reported Schroders.
Correction in Prices in UK’s Real Estate Market
Britain’s real estate market has reportedly encountered a sharp correction in prices since the onset of the financial crisis of 2008. Last summer, capital values started to plunge and are now around 21% below their peak value last June.
But, how much more will the price slump before the market is stabilised and investors feel confident to place their capital again?
Increasing Cost of Borrowing – The Main Culprit
A hefty hike in interest rates affecting investor sentiment is the key factor contributing to the rapid depression in capital value. Within a year, the total cost of hedging debt on good quality assets has soared to 6% from 3.5%. The yield on 10 year bonds in the UK is now at 3.75%, which was roughly 1% at the beginning of 2022.
As a result, investors owning equity and debt-backed buyers have asked for lower prices as part of their effort to hit their return targets.
The buyer-seller stand-off has driven up the gross real estate yield and depressed transactions.
In January 2023, the average initial yield soared to 5.2% up from 4.2% in June 2022. The total transaction value recorded in the final quarter of 2022 slipped by 60% from 2021. On the other hand, rental values continued to rise gradually through the second half of 2022.
Inflation Is Showing Signs of Decreasing
Whether the paradigm will shift to the right largely depends on interest and inflation rates.
The UK’s inflation rate is now at 10.40%, compared to 10.10% in February and 6.20% last year—higher than the long-term average of 2.73%.
The higher inflation rate looming over the country can lead to inflated interest rates making borrowing costs spiral upward.
However, with supply bottlenecks easing and utility prices starting to stabilise, inflation is anticipated to halve and reach roughly 5% by the end of this year.
Meanwhile, the Bank of England (BoE) is forecast not to raise interest rates any further this year after increasing it once again to 4.25%.
Again, despite falling prices, the UK housing market is showing signs of stabilisation, as buyer inquiry and sales activities increased last month.
A net balance of -29% of surveyors reported a rise in new buyer inquiries last month, up from -45% in January. Even though this is the 10th negative reading in a row, indicating a decline in demand, it is the smallest drop since last July, said The Guardian, citing Royal Institution of Chartered Surveyors (RICS) monthly survey.
That said, the demand for high-end real estate agents like Quintessentially Estates is expected to increase with the housing market rebound. A top-tier real estate company is always on hand to help clients with all property needs.
Schroders anticipates that the plunging house prices in the UK will push the BoE to adopt monetary policies to keep interest rates low.
Buying Interest Is Increasing
Analysts unanimously agreed that the rising yields since last year are making the real estate market affordable to investors with equity and UK pension funds.
“The spread between the average initial yield and 10-year bonds is now back to 1.5%, close to its average of 2% over the last 30 years,” reported Schroders. “The gap is lower than in the last decade when it averaged 3%, but the spread was exaggerated by quantitative easing which artificially lowered bond yields.”
Again, with international investors snapping up properties in the UK, the country’s real estate market is getting a boost.
The UK’s real estate market has been ranked second globally amid a resilient economic recovery with Asian, North American, and Middle Eastern investors interested in European properties.
As a result, the UK has been identified by far as the largest and most liquid commercial real estate market in Europe and has been re-priced more rapidly. To some extent, the reason is the stabilising British sterling and falling political and economic risks after Rishi Sunak has been appointed as the UK prime minister in October 2022.
Real Estate Market Falling into Place
With investor demand gradually falling into place, the UK’s real estate market has started recovering. Stabilising British Pound value, faster re-pricing of the UK’s real estate market, and bond yields approaching equilibrium are all making the market radiate optimism. If the soaring inflation rate and current looming recession in the UK continue to ease, investors are expected to consider deploying capital later this year.