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Safe as houses? What Brexit could mean for property investors.

Posted on 30/03/2017, by Joe Jones

This week, Prime Minister Theresa May invoked Article 50, ending months of speculation about Britain’s future in the European Union. For property investors, Leavers and Remainers alike, even a sniff of certainty will likely come as a welcome relief.

Big question marks still linger, however. Will Britain be able to secure a favourable exit deal? What form will its future trade relationships take? Is Scotland going to have a second independence referendum?

These issues, among others, are already having a knock-on effect on Britain’s property sector. Last year, the number of homes on the market hit a record low as house price growth slumped in the wake of the Brexit referendum. While the Royal Institution of Chartered Surveyors (Rics) and National Association of Estate Agents both reported that buyer demand continued to fall.

So, now that the wheels of Brexit have been set in motion, should property investors be worried? We would argue, no.

As an asset class, there’s a reason we think property is one of the most dependable options around. For many years now there has been a demand for houses that well exceeds supply. And, fuelled by demographic change, immigration, rising incomes and greater availability of mortgages – not to mention a failure to build new homes at the pace required – that trend is likely to continue. Projections from the Department for Communities and Local Government (DCLG) suggest that the number of households in the UK will grow from 22.7 million in 2014 to 27.6 million in 2037.

As a result, if the age-old model of supply and demand is to be trusted, investors can be confident that there will likely be buyers on the market for residential property, even in a more turbulent climate. This, especially when compared to the stock market, might give some reassurance. During the economic crisis, the biggest year on year fall in UK house prices was just over 15.5%. The FTSE 100, on the other hand, rose and fell much more sharply over the same period (of course, investors should never rely on past performance as it’s not a reliable indicator of future performance).

Another point to consider is whether you’re investing in property equity or debt, with one being much more exposed to house price fluctuations than the other. Equity investors should be paying much closer attention, as their investment is directly tied to the value of a property. Lenders, on the other hand, such as those who use property-backed peer-to-peer (P2P platforms), may only be affected should a borrower fail to repay their loan and the property be sold to recover the initial investment.

At Octopus Choice, we take several measures to help mitigate the risks involved. Our expert property lending team will only approve loans with a maximum ‘loan to value’ (LTV) ratio of 70%. This means that, overall, were the borrower to fail to repay their loan, the property we’ve taken as security would have to fall in value by more than 30% before any of your capital would be lost. Octopus also invests 5% of any loan alongside you and, should a loan default, investors would receive their interest and initial investment back first before we receive any.

Octopus Choice also only invests in short term loans – typically between nine months and two years. This means our investors are much less susceptible to a long-term decline in property prices.

Property lenders do need to be careful though, as there are exceptions. For example, the Brexit vote last year led to a drop in prices for multimillion-pound Central London homes - Savills said prices for prime central London properties fell by 6.9% in 2016. That’s why we currently don’t lend against any Central London properties.

The commercial property space can also distort the picture for observers, which is likely to take a bigger hit from Brexit as businesses adapt to a UK no longer tied to Brussels. Schroders’ Emma Stevenson recently told City AM that London’s office market is their main concern, especially as “there is a risk that banks and other financial services will have to switch some of their activities to the EU.” These factors are of course a concern, but shouldn’t affect Britain’s housing market - it’s important not to blur the two.

Even this may only be temporary, however. We believe London will remain a hub of international business and world class talent, while the weaker sterling could in fact increase demand for property from overseas buyers.

Ultimately, investors need to be sensible with the variables they do have control over. Chief among them, in our opinion, is the quality of the underwriting. As negotiations to leave the EU push ahead, we believe the property market will no doubt fluctuate in response. So, you should be sure your investments are made wisely and with enough of a buffer to protect you should anything unexpected occur.

At Octopus Choice, our team of expert property lenders has, since 2009, lent over £2.5 billion and lost less than 0.1%. While past performance isn’t a reliable indicator of future results, we think it’s a pretty impressive record, providing Britain’s investors with a way of aiming to make their money work harder, without taking on more risk than they’re comfortable with.

Your capital is at risk if you lend through Octopus Choice and lending is not covered by the Financial Services Compensation Scheme. Read the full risks here.