Property and politics

The opportunity recently to present to a room of Kuwaiti investors on the outlook for UK real estate was a first for me, as I felt obliged to open with a slide or two on politics.

Reflecting on former chancellor of the Exchequer Kwasi Kwarteng’s so-called ‘mini budget’, which would, if it had been implemented, have been the largest tax giveaway in 50 years, I took as a positive that the debacle had been dealt with in less than a month. However, the interim impact was substantial and reminds us that overseas investors into the UK, Islamic or otherwise, are expecting stability, not a soap opera played out in the press.

As readers will be very familiar, the pound sterling looked dangerously close to reaching parity with the US dollar at one stage, but has at the time of writing, recovered to its pre-‘Kami-Kwasi’ budget level of US$1.15. Meanwhile, taking another benchmark, the FTSE 100, this is back to within touching distance of before the Liz [Truss] and Kwasi show.

The UK is forecast to do remarkably well this year, the Economist Intelligence Unit predicting 4.4% GDP growth, comfortably ahead of both the US at 1.5% and the EU at 3%. But all are battling largely the same inflation, with projected year-end inflation across the US, the UK and the EU all at around 8%.

With interest rates the tool of choice to tackle such rising prices, usually with the government not undermining such efforts, the increase in benchmark three year interest rate swaps is remarkable, with both the US and the UK up around 350bps, and the EU up 300bps.

Shariah compliant investors having been spoilt by low rates for so long, with the previous toughest decision being whether to fix for three or five years, this has all come as a bit of a shock, with plenty of my time being spent recently talking to investors about how best to react to this.

For despite the best efforts of the UK government to undermine confidence, the appetite of investors to invest into the UK remains largely undiminished. Familiarity and the solid property laws underpinned by the Land Registry help a great deal, and for some the lower level of the pound sterling provides an opportunity.

While many are switching from levered transactions to all cash, our advice remains unchanged for the last 12 months or so, being to seek investment strategies that capture inflation. To coin a phrase, inflation can be your friend, not just the foe that drives finance costs up.

Numerous studies over the years have identified that real estate provides an effective hedge for inflation, but some opportunities are better than others. The residential sector continues to get our attention in that regard, both the private rented sector and student accommodation, particularly when rising mortgage costs are likely to encourage or force would-be home purchasers to stay in the rental sector.

So, every cloud has a silver lining, every challenge provides an opportunity. But if the UK government can stay out of it, that would please me greatly. For politics, boring is best. Fingers crossed!

Written by Philip Churchill, first published in Islamic Finance news Volume 19, Issue 46 dated 16th November 2022.