Combining the opportunities for long-term capital gains and ongoing rental returns, residential property has long been an attractive asset class for global investors, with the UK a particularly popular destination.
Investments in the UK property market by international investors increased in 2023, with HMRC data showing that foreign buyers accounted for 1.4% of all property transactions in the year ending March 2023 – an increase of 20% on the previous year. Meanwhile, letting agent data says that foreign homeowners are estimated to hold more than £84.2bn worth of UK property.
These figures underline the UK’s position as a leading destination for global property investors, who are typically seeking second homes and buy-to-let (BTL) properties.
However, recent media reports suggest this appeal may be declining. In fact, some commentators are predicting that foreign investors could soon exit the UK BTL market en masse. Largely, this speculation was born out of the uncertainty created by the build-up to the Autumn Budget.
That said, as landlords get to grips with the changes that were announced on 30 October, I think the market’s desirability will continue to shine through.
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Concerns over regulatory and tax reforms
In July, Labour came to power for the first time in 14 years. Consequently, there was considerable uncertainty about how foreign investors would respond to the anticipated regulatory and tax reforms.
On the regulatory front, much-anticipated reforms to Section 21 (no-fault evictions) were presented to Parliament in the Renters’ Rights Bill in September. If passed, these reforms are likely to complicate tenant management, particularly for investors who reside outside the UK.
Additionally, the Labour Party has announced a consultation about introducing Energy Performance Certificate (EPC) requirements, which could result in significant costs.
Moreover, the non-dom tax status was abolished, which many commentators suggest could lead to a mass exodus of global investors. However, while details remain unclear, it appears that it will be replaced by a temporary scheme aimed at incentivising high-net-worth individuals (HNWIs) and investors to come to the UK.
This indicates that the government recognises the importance of keeping the UK open to overseas investments.
On a similar note, landlords have been exempted from a new capital gains tax (CGT) hike. While CGT on assets such as stocks and shares is rising, CGT on residential properties will remain at 10% (lower rate) and 20% (higher rate). This move suggests that the government aims to prevent a significant number of landlords from leaving the BTL sector, recognising how important they are to a healthy and functioning market.
These measures were largely anticipated and, if anything, are less substantial than initially feared. However, the Budget included an unexpected provision that will affect many investors’ decisions in the coming weeks and months: an increase in stamp duty land tax (SDLT) on second homes.
Rachel Reeves announced an immediate increase of 3% on the second home surcharge, meaning that anyone named on a deed must now pay a 5% tax on any additional property they purchase. This will significantly impact landlords looking to expand their portfolios.
As a result, these changes will require careful consideration by foreign investors (and domestic landlords as well) following the Budget and could lead to short-term hesitation among overseas buyers. We therefore expect speculation around the BTL market to continue for a while longer.
Take speculation with a large pinch of salt
However, such speculation is common in the BTL market and often remains just that: speculation.
In truth, time and time again, whether it is Brexit or new stamp duty surcharges, there is frequent scaremongering about the ‘death of BTL’ and a mass exodus of landlords, including those from overseas.
And yet, these forecasts never turn into reality. In 2016, for example, the opposite occurred; foreign investment actually surged as buyers capitalised on the pound’s decline post-referendum and the perceived value of UK assets.
The same trend was observed after Truss’ mini Budget, when many buyers from North America seized the opportunity to purchase properties at a relative discount due to the weakening of the GBP against the dollar.
Clearly, despite regular predictions of downturns and challenges, the BTL market continues to attract foreign investment and demonstrate remarkable resilience, proving that speculation rarely reflects the underlying strength and potential of this sector.
Market fundamentals are still intact
In my view, this remains the case in today’s market.
Why? Fundamentally, because, beyond the potential capital growth and rental yields when investing in the UK, the country has an incredibly strong appeal as a desirable place to live, work, and visit.
The UK boasts a rich cultural heritage, which will always appeal to overseas buyers. What’s more, the UK is well-known for its transparent legal and robust political systems, which provide investors with a sense of security and stability. This is then boosted by the economy, which, despite some turbulence in recent years, is one of the most stable in the world.
These are important factors that draw investors to the UK, but it would be remiss of me to suggest that the potential for capital growth and rental yields are not the most significant draw. After all, since 2005, average UK property prices have grown by 88% from £150,663 to £284,691. Meanwhile, between 2009 and 2023, average weekly rents rose from £153 to £231 – an increase of almost 51%.
This trend of growth is expected to continue, further questioning any notions that the desirability of the UK’s BTL market is waning among international investors.
According to Savills, for instance, prices are projected to rise by 2.5% in 2024, followed by steady increases over the next four years, leading to an overall house price growth of 21.6% between 2024 and 2028. Furthermore, forecasts indicate that rental growth will reach 20.5% over the next five years.
For me, the long-term strength and stability of the BTL market must always be factored in when assessing the latest trends and speculation.
Clearly, change is afoot, and it would be foolish to ignore it; while the UK BTL market continues to demonstrate strong fundamentals and enduring appeal for overseas investors, the presence of regulatory uncertainty should not be overlooked.
As such, it is crucial that overseas borrowers find lenders and brokers that can effectively navigate these challenges. In doing so, they can capitalise on the opportunities available in this resilient market, ensuring their investments thrive in the years ahead.