Prime Time for Currency Climate Success

When it comes to property investment, one of the common advantages that international investors can leverage is the currency climate. As any seasoned investor will tell you, investing overseas is a fantastic way of diversifying a portfolio and can also result in finding value through favourable foreign exchange rates.

Take the UK market for example. Sentiment plays a huge role in driving demand and heavily contributes to the rises and falls of the market. With this in mind, Brexit’s impact cannot be understated – both property prices and the strength of the UK currency has been affected by ‘Brexit uncertainty’. But how can this help investors from regions across Asia such as Hong Kong, India and the UAE – all typically prolific investors into the UK.

Brexit Uncertainty

Before we examine the currency climate, it’s important to understand the market itself. UK property has effectively been turned on its head over the last decade, as London, the ever-popular investment region, began to see declines and markets such as Birmingham and the London Commuter Belt emerged at the forefront. 

Since 2016, around the time of the Brexit vote, this growth has been brought into particularly sharp focus. London prices flatlined and Birmingham has led the way with nearly 16% property price growth over the last three years, compared to an overall growth of 11% according to the UK House Price Index. Similarly, the South East has benefitted from nearby London’s decline and is set to be the fastest-growing region by 2022, outpacing the national average with 3% price growth each year. But why has this major regional core (and others like it) suddenly come into the spotlight?

A big part of it is the affordability factor. These markets are already much more affordable than the capital and are still forecast to deliver better average growth going forward. At the same time, as uncertainty causes some investors to hold fire on a variety of purchases, the strength of the Sterling and property prices in general has fallen.

At the same time, the UK market is a perfect storm of high tenant demand and nationwide undersupply. There’s never been a time like this and may not be in the near future – when the right investment can be incredibly lucrative because of all these factors coming together. This is what makes UK property so appealing for overseas investors.

Favourable Foreign Exchange Rates

As the UK currency declines, we’re also seeing many foreign currencies peak. A key date for Hong Kong investors (and international investors in general), was June 2016 – the date the Brexit referendum was confirmed. GBP is 12% cheaper today than it was in June 2016 and the HK dollar is still reaching new highs.

In this graph from XE, we can see that over the last year the Hong Kong dollar has steadily improved against the Pound Sterling to some of its highest peaks in years. This means HK investors can increasingly find savings through foreign exchange, taking advantage of the uncertainty to stretch their own money in these prime investment locations.

If we look even further back to 2016, we find the following: 

• In 2016, the average £250,000 property cost: 2,857,500 HKD
• In 2019, the average £250,000 property cost: 2,414,435 HKD

In 2016, the average UK property was 18% more expensive than it is today for Hong Kong investors today.

Similarly, investors from the UAE have found that UK property represents an opportunity to find an excellent deal, providing the opportunity to stretch domestic currency much further. Consider that in 2016, prior to the referendum, the average London property cost around Dh2.7m compared to today’s price of around Dh2.2m – a huge change based purely on fluctuations in the exchange rate and of course, continued recovery in the property sector.

For most overseas investors, the UK market represents a clear opportunity. While many areas are demonstrating excellent growth and continuing to remain affordable, the market itself is suffering from chronic undersupply. This competitiveness typically means that UK properties have the potential to generate consistent immediate returns.

Looking Ahead

So what does this mean for overseas investors right now? A wait-and-see approach can be prudent for those that want more stability in the market but those who do choose to wait may find the market stabilises against their favoured direction, meaning they may lose a dominant exchange position. An invest and wait approach, on the other hand, means International investors can leverage funds against the weakened Sterling further from the get-go and affordability in certain regional UK areas means yields are much higher than you would usually expect. 

Currency benefits or not, the private rented sector in the UK and time will typically play a huge part in any investment. Property in particular favours a long-term approach, allowing the asset to generate returns, achieve natural growth and benefit from compound interest – consider that over the last 20 years, UK property has seen growth of almost 213%. Whilst holding out can be the right move for those seeking stability, they will typically lose out on maximising returns and stand a chance of not finding the same level of value that’s present in the current currency climate.