UK residential investment: a temperature check

Over the past 12 months, the UK investment market has been rocked by a series of economic and political events, ranging from Liz Truss’ disastrous mini-budget back in September 2022 to the sequence of BoE base rate rises, now at 4.25% and expected to peak at 4.5%.

Needless to say, it’s been a time of uncertainty for many investors and landlords, however, market activity has anything but stalled. Having been through Brexit and Covid, the residential sector has remained resilient and even buoyant in the face of challenges. Over the past year though, we’ve seen the balance tilt in favour of buyers, and there’s been some price readjustment in the market. This is hardly surprising given the increase in the cost of borrowing, with commercial lending rates at 6.5-7%, making some previously appealing opportunities less feasible for would-be buyers and resulting in a more limited investor pool for the sellers to rely on. These changes, affecting investors’ ability and willingness to transact on old terms, have prompted those looking to sell to adjust their pricing expectations, while others, faced with the inevitability of having to refinance their loans on much less favourable conditions, are now being forced to dispose of their assets.

Property is often perceived as a relatively safe and reliable investment class, known for its ability to hold and grow in value as well as producing income, and residential property is particularly well placed to ride out the market uncertainty we’re faced with today. The housing shortage across the UK is well documented and isn’t something we would expect to be fixed overnight – if anything, given the upcoming changes to EPCs and the Renters’ Reform Bill, many smaller landlords will be forced out of the market, which will tighten the supply of available homes even further, inevitably leading to a rise in demand.

A challenging period for many, now is also the time of opportunity for others, especially cash buyers looking to expand their portfolios, and we have certainly noticed an increase in appetite for well-priced residential assets across the UK, however large or small. The fact that rental values are on the rise across the country has also helped fuel the demand for residential stock.

We recently sold an unbroken PD block in Purley comprising of 86 apartments for £26m, the sale represented a 6.25% gross yield which for PD stock represents an excellent result. At the other end of the spectrum we have a block of eight two-bedroom flats with asset management potential in Maidstone (guided at £1.1m), has received interest from over 100 investors and is currently under offer over the guide price.

A discount on Vacant Possession Valuation (VPV), a good yield or a combination of both is what makes an opportunity attractive to investors, and given today’s challenging economic situation, it is essential that at least one of these factors is in place to pique prospective buyers’ interest. It is worth noting that pricing assets in the current market environment has to be exercised with caution, due to the absence of up-to-the-minute comparable evidence and the need to rely on last year’s valuation and HM Land Registry data. Getting more data on recent deals will certainly help justify any price adjustments, particularly when ensuring valuations stack up.  

Having operated in these uncertain market conditions for a while now, we’ve witnessed a series of transitions. During Covid, the market forces sided with sellers for a number of reasons, including the Stamp Duty holiday, the savings glut and the well-documented challenges faced by the commercial property sector, making residential top of the shopping list for many.

The tide has turned, and we’re now facing a different reality, where the cash buyer is king. Despite the changes in the market dynamic, correctly priced residential property remains in high demand, offering an opportunity not only to insulate capital from inflation, but also grow it over time – something that resonates with many.

All it takes is spotting the right opportunity at the right time, and if what we’re seeing in the market is anything to go by, there is plenty of excellent stock out there and there couldn’t be a better time to invest, subject to price.