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Property has long been a popular investment class for many investors, such as real estate investment trusts (REITs) and buy to let. The average house price is 65 times higher today than in 1970, bestowing many with healthy capital gains, whilst regular payments from properties (e.g. rental income from tenants or dividends from REITs) has, for many, also been a powerful source of income along the way. Yet what might 2023 hold for property investors? Is the sector facing more tailwinds than headwinds or vice versa? In this article, our team at Bure Valley Group offers a summary of some of the key market forces that could influence property assets in the coming months. We hope these insights are useful to you.

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Key tailwinds

The UK still faces a huge shortage of homes. The government tries to build 300,000 new homes each year to match demand and keep housing costs affordable, but less than 250,000 were built in 2021. Cities, particularly those in the Greater South East of England (e.g. London and Brighton) face the biggest shortages. This continued demand is likely to keep house prices from falling dramatically in 2023. Another upward force on the housing market is regulation. Since the global financial crisis (2008-9), strict rules have kept higher loan-to-value lending at sensible levels. Unemployment is also still very low and is not forecast to rise dramatically, which should help to keep forced sellers at a minimum.


Important headwinds

Whilst there are many investment opportunities ahead for UK investors in 2023, there are some key forces applying downward pressure on the market. First of all, UK interest rates have been rising since late 2021 and now stand at their highest in over 14 years. With inflation standing at 11.1% (and possibly set to rise higher in 2023), there is little sign that the Bank of England will reverse interest rates anytime soon. Much of UK inflation is being driven by global forces such as the war in Ukraine, which is driving up energy and food prices. Higher interest rates tend to push down property prices since buyers cannot afford to take out as large mortgage loans as before. Already, there are signs that UK mortgages are becoming more expensive and many attractive deals – including buy to let mortgages – have been pulled from the market. 

Secondly, UK government policy has arguably been a net negative force on the property sector in recent years (with little sign of imminent change). Whilst some measures were welcomed by property owners – e.g. the COVID “mortgage holiday”, the temporary reduction in stamp duty rates and the temporary increase to thresholds for Stamp Duty Land Tax – it is undeniable that many policies have undermined investors’ property investments. Notably, the removal of mortgage interest tax relief for residential landlords has put a dent in many landlords’ profits. The government is also phasing in stricter green energy requirements for properties; an EPC rating of ‘C’ or above will be needed for new tenancies by 2025, and for every existing tenancy by 2028. For many landlords, this will require a significant capital outlay.

More recently, the UK government also announced a reduction of the Annual Exempt Amount from April 2023 – from £12,300 in tax-free capital gains in 2022-23, to £6,000 in 2023-24. This will likely lead many landlords to bring forward planned property sales to try and minimise their capital gains tax (CGT) liability and could put downward pressure on property prices.


Implications for property investing

The UK property market always faces a combination of headwinds and tailwinds which varies regularly as the economy, market and investor sentiment change. Even with a clear view of the key forces at play, moreover, it is impossible to completely predict what will happen to property investments in the months ahead. As Prime Minister Harold Macmillan once said, the greatest challenge of a statesman (and an investor, for that matter) is: ‘Events, dear boy, events’. Given this continuous “fog of war” that exists, it is important for investors to remain diversified across asset classes – and, within them. For property investors, this might look like investing in multiple property markets (e.g. UK regions and global regions) and different property “vehicles” – such as buy to let, REITs and property loan notes. It is a good idea not to tie up too much wealth with any single investment, especially if this is an illiquid one (which property often is). Speak with a financial adviser if you think that your property portfolio is due a review, to ensure it continues to reflect your risk appetite and long-term strategy.



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