The news that the Federal Reserve raised US interest rates in December set UK pulses racing.
On the one hand, some felt that the UK should quickly follow suit. On the other, some commentators pointed to the low oil price, volatility in China and previous mis-steps by the European Central Bank and Swedish Central Bank in 2011 to caution against raising rates.
In a carefully measured announcement, on 19 January the Bank of England in effect highlighted the uncertain outlook. Governor Mark Carney ruled out an increase in the short term, overturning previous indications that rates would rise in early 2016.
Over the medium term, he offered no more clarity. On the one hand, he asserted that any future increases would be small and gradual. On the other, he emphasised that changes to interest rates do not “have a set timetable; only an expected direction of travel”.
Arguably, however, the intense focus on interest rates risks obscuring the more basic point that they are not the only drivers in the property investment market. There are other equally important fundamentals to consider.
There are three trends in particular that my experience suggests are likely to have an impact in the medium term.
Firstly, foreign investors continue to value the UK highly as a safe haven. Secondly, investors are increasingly looking for diversification. And thirdly, there is a growing recognition that core regional centres offer the clearest growth potential and therefore the greatest opportunity to add value.
As a result, prime regional locations not only look set to attract a growing share of investment funds, but evidence suggests that the process is already well under way.
In the current climate, the most prudent course of action for investors is to act on the basis of the market as it is, rather than on the basis of speculation of how it might change.
So what is the current state of the property investment market?
Clearly the UK, the property market – especially London – has been buoyed by a huge influx of global capital since the crash. Across commercial (Qatari Diar at the Shard and the South Bank), residential (Berkeley Homes’ Far-Eastern sales roadshows) and retail (Westfield’s malls in White City and Stratford), London has attracted huge inward investment as it is seen as a safe haven.
The key point here is that it is largely global politics, rather than global economics, which has driven demand for UK assets.
With continuing unrest in the Middle East, uncertainty in emerging markets like Russia and Brazil and fears over how China is managing its economy, the UK’s desirability as a safe haven for investment seems unlikely to be affected by a punative 0.25% rate rise during 2016.
Understandably, recent foreign investment has centred primarily on London. But is the capital now reaching the limits of how much property investment it can absorb?
Firstly, as property asset prices have gone up, yields are coming under increasing pressure. London’s businesses and residents cannot continue paying higher property rents indefinitely. As a result, investors’ opportunities to add value in London are increasingly limited.
At the same time, the sustained influx of investment means that the number of attractive investment-ready projects in London is dwindling. Competition for those that remain is increasingly intense.
There is also a recognition that the level of foreign investment could itself come to be a source of risk in the future, since capital is always mobile.
In that context, diversification away from London is now a sensible precaution.
Faced with the desire to diversify investments and secure decent returns while also keeping the sense of security offered by the UK’s safe haven status, it is logical that investors are starting to look more at opportunities outside London.
The attractiveness of opportunities in prime regional centres has been further boosted by George Osborne’s devolution agenda. Government funding, particularly for infrastructure, will support the growth potential of the core regional cities. At the same time, such a clear political commitment helps investor confidence.
Among the hoopla of daily trading on international markets, it is easy to forget that interest rates tend to change in response to macro-trends as much as they drive them.
Waheed Nazir is strategic director, economy, Birmingham City Council
