Post-Mortem: Brexit's Impact on the UK Real Estate Market
Analysts predicted that 2016’s Brexit referendum would devastate the UK’s property market. Almost eight years in, how is it faring?
This week’s Thesis Driven is a guest letter by Mattis Dougray. It analyzes the impact of Brexit on the UK real estate market.
The Brexit referendum led to dire predictions of the future of the UK real estate market. Prognostications of foreign capital flight, empty offices, and dramatic home price declines dominated headlines surrounding the country’s exit from the EU common market.
As we step into 2024, it's an opportune moment for a retrospective look at Brexit's impact on UK real estate. In this analysis, we will explore the UK real estate industry’s journey through the challenges brought by Brexit while considering its global position. We'll dive into:
Shifts in investor interest in the UK’s real estate market since 2016;
The loss of the single market and resulting disruptions in supply;
Differential impacts across London and other UK regions;
Residential demand and its impact on home prices;
The office sector’s surprising performance after the dual punches of Brexit and COVID-19.
International Investment Interest
In the immediate aftermath of the Brexit vote, property transactions experienced a temporary halt as investors re-evaluated deals and reconsidered their positions. This pause was a natural reaction to the political shockwave rather than a reflection of fundamental economic instability. As the dust began to settle, the market rebounded strongly, with the UK experiencing a post-Brexit property boom. International investors continued to display an interest in UK properties, albeit with a change in their preferences and strategies. As EU investors pulled back, others—primarily US and Asian capital—swooped in to take their place.
Much investor interest was driven by the collapse of the pound as it fell to a 31-year old low against the dollar following Brexit, providing a windfall for investors holding US dollars. For example, when taking currency and price swings into consideration, a US buyer in prime central London would have benefited from a discount of 27% compared to the pre referendum era. By 2022, the United States was the leading source of foreign direct investment in Europe's financial services sector, with the United Kingdom emerging as the primary destination of this investment.
On top of that, Chinese investors poured record amounts of capital into London property post-Brexit, with the first half of 2017 witnessing a monumental influx of £5 billion in property investments into London's financial heart. Among London's districts, the West End's office market, located in the city's centre, stood out with the most impressive performance. Notably, investors from China and Hong Kong were pivotal, accounting for half of the 64 transactions in the region.
A prominent example of this trend is the acquisition of London's most expensive building, the "Walkie Talkie," by an investor from Hong Kong, who secured it for a substantial £1.3 billion. Food conglomerate Lee Kum Kee, renowned for its oyster sauce production, completed the purchase in July 2017. Even in the context of London's property market inflation over the decades, this sum was unprecedented. Earlier in the year, the tallest building in London—commonly known as the 'Cheesegrater’—was bought for £1.15 billion by CC Land, a subsidiary of a Chinese real estate brand.
Foreign investors were clearly not put off by the UK’s exit from the EU. Instead, international investors saw a generational discount on buying prime assets in London, a global financial hub, and took it.
Supply’s Role
Prior to Brexit, Chancellor George Osborne warned that home prices could fall "up to 18%" after the country’s exit from the EU. But London and the broader UK residential real estate market has displayed remarkable resilience in the face of multiple challenges. Contrary to projections, average house prices in the UK not only held steady but actually increased by 20%, rising from £212,887 in June 2016 to £256,405 in March 2021.
Any negative impacts of Brexit on property prices were more than offset by the same forces that have pushed prices higher elsewhere: rising construction costs and (at the time) historically low interest rates. Increasing cost of construction and delayed supply chains led to housing shortages, and coupled with the historically low 0.1% interest rate in 2020, more than erased any negative impact of Brexit on home prices.
In addition, the UK's departure from the European Union led to even greater disruption in the supply of labour and goods than was seen elsewhere, driving housing costs even higher. The end of free movement between the UK and EU member states meant stricter immigration controls and new visa requirements, leading to the loss of a substantial number of foreign construction workers. This has compounded the effect of supply chain disruptions seen around the world.
Between 2015 and 2022, data analysis shows a notable increase in construction costs in the UK. Construction materials, including cement, timber, and steel, witnessed a significant 60% increase in their prices during this period, while labour costs also rose by 30%. These implications have led to even higher property prices, rents, infrastructure budgets- impacting affordability.
With immigration restrictions and challenges in recruiting skilled workers, the cost of construction will likely continue to rise, further impacting the supply of new properties and exerting upward pressure on house prices in the UK residential real estate market.
It's important to note that in the UK, there is no "by right" development—all development projects require the consent of the relevant local authority. And even when a proposed development aligns with planning policy, final decisions are often heavily influenced by elected councilors who, in turn, are influenced by their local constituents. This matter becomes even more complex in large cities like London, where each borough has its own policies for certain types of development, such as co-living arrangements. This approach to planning policy creates uncertainty for developers and has contributed significantly to the UK’s current housing shortage.
Residential Demand Maintains a Strong Pace
Despite higher prices and the UK’s exit from the European Union, residential demand has remained strong. Between July 2016 and May 2022, there were 7.24 million residential transactions in the UK, as per HMRC data—a notable increase of 14.4% compared to the same prior period before the Brexit referendum, which recorded 6.32 million transactions. Digging into specific regions of the UK provides additional color:
London
London is benefiting from continued population growth. In 2020, it surpassed 9 million, and the working-age population is projected to grow by 8.7% between 2022 and 2032, increasing the demand for housing, notably from young professionals. London remains a hotspot for international students and graduates, with universities such as UCL and LSE, along with a diverse culture and strong job market, attracting students and professionals from around the world.
In the middle income housing segment, there is an annual demand of 12,500 properties in London. An example property within this segment, The Filaments by Mount Anvil, features a typical two-bedroom flat priced at £570,000 with a monthly rent of £2,000. This category caters to a diverse range of renters, including young professionals who may include recent graduates or students seeking housing options within this price range. These individuals often share accommodations with friends due to the challenge of affording substantial deposits.
In stark contrast to the more affordable mid mainstream segment, the high end segment caters exclusively to ultra-high net worth individuals seeking trophy homes and secure investments in the realm of luxury properties characterised by properties priced over £2,000 per square foot (psf), there is an annual demand of 350 said properties in London. Take, for instance, Grosvenor Crescent which represents this segment with a typical two-bedroom flat priced at £5 million, commanding a monthly rent of £10,000. The prospective buyers in this category are predominantly ultra-high net worth individuals, often with substantial assets and equity driven primarily by Chinese and Russian buyers.
Manchester
Manchester is the fastest growing city of JLL’s ‘Big Six’ (Manchester, Birmingham, Bristol, Leeds, Edinburgh, Glasgow) as of 2022. Manchester has also experienced the largest employment and population growth over the past decade. The city continues to attract young professionals looking to access higher education or to benefit from opportunities and access to great bars, restaurants, and leisure facilities. Demand continues to outstrip supply with JLL witnessing an increase in rental applicants of 25% over the first six months of year 2022 compared to the same period in 2021.
While the bulk of residential demand in the UK was concentrated in the London area, a significant factor motivating an increasing number of individuals to relocate from London to Greater Manchester is the considerably lower property prices. On average, a residence in the Northwest of England (Manchester) is priced at £155,868, which is approximately 67.8% less expensive than the average cost of purchasing a home in London, which stands at £484,584. According to the Deloitte Crane Survey, there are approximately 12,000 units under construction in Manchester which will be delivered by 2025.
As of June 2023, the Big Six cities, saw an average yearly increase in rental rates of 14.3%, with Manchester leading the way with the highest annual growth rate at 19.6%
Birmingham
Birmingham is experiencing both growth and a rising population. As with Manchester, people are viewing it as an alternative to London due to lower housing costs. The population is due to increase to 1.24m by 2030, up from 1.16m as of 2023- a growth of 10% since 2011. The outlook for the housing market in Birmingham seems promising. JLL experts predict a 9.3% growth for the Northern region between 2023 and 2027, exceeding the anticipated average growth of 8.9% across the UK. Birmingham, specifically, is expected to see a significant 19% increase in property values in the next five years, making it stand out even in economically challenging times.
In 2022, Moda completed its 42-story tower on Broad Street, known as The Mercian, and Grainger's inaugural project in the city, Gilders Yard, situated in the Jewellery Quarter. These developments brought the total number of completed projects to 9, with a total of 2,675 units in Birmingham.
Rents have been rising across the city, particularly over the past year as increased demand battles with supply constraints. The average Birmingham rent is £1,520 according to Home.co.uk Birmingham property price forecast suggests this increased demand could mean Birmingham rental prices rise by 19.3% between 2023 and 2027.
Edinburgh
Scotland's capital has a population of approximately 530,000 and is consistently recognised as one of the most appealing cities in the United Kingdom and earned the "Best City in the World 2022" award by Time Out.
Edinburgh's BTR has attracted over £160 million in investments in 2022. This figure includes a significant £124 million forward funding agreement with Swedish investor Heimstaden Bostad for Platform's development consisting of 464 homes in Bonnington, Edinburgh. Furthermore, in January 2022, MODA launched their development known as The McEwan, featuring 474 units, where rents are now achieving more than £35 per square foot.
The city currently has a pipeline of more than 4,000 Build-to-Rent (BTR) homes. However, it remains to be seen if this pipeline will be delivered- the investment market has been frozen since the Scottish Government introduced rent controls 18 months ago.
Currently, the average monthly rent for a one-bedroom flat in the city stands at £908, while a two-bedroom flat commands £1,225 per month, and a three-bedroom flat averages £1,737 per month. These figures represent a significant annual increase of 15.3%- much of this rental growth is being driven by a restricted supply delivery, a direct result of the rent control legislation referred to above.
Office demand 
The uncertainties surrounding Brexit significantly influenced the office real estate market in the United Kingdom. The long-anticipated separation from the European Union prompted many businesses to adopt a wait-and-see approach, delaying important real estate decisions as they grappled with the exit’s implications.
Many financial firms that had previously used London as a gateway to the EU market were compelled to reconsider their strategies. Organisations wanted to maintain access to EU cities and markets which initially led to reduced demand for office space in London. The EU's regulatory framework and the passporting rights that allowed UK-based institutions to operate seamlessly across the EU were no longer applicable to British firms.
As a result, numerous financial institutions, including banks, investment firms, and insurance companies, made the strategic decision to establish or expand their presence in EU cities such as Frankfurt, Paris, Dublin, and Amsterdam. These cities offered proximity to the EU's regulatory bodies and ensured continued access to the single market. In doing so, they aimed to maintain uninterrupted service to their EU clients and minimise potential disruptions to their operations. This mass exodus of financial institutions from London initially had a noticeable impact on the demand for office space in the city. Vacant office buildings and available office leases became more prevalent, leading to a temporary oversupply of commercial real estate.
But there are reasons to be optimistic about the UK office outlook, especially given London’s remarkably strong return-to-office over the past 18 months—dramatically outpacing the United States. Despite business flocking into European cities, as of 2023, the volume of space under offer is 8% ahead of the ten-year average, signaling a potential market rebound. Moreover, active demand has surged by 27%, indicating increased interest and activity in the London office space sector as it strives to recover from recent economic changes.
Data from Envoy reveals a remarkable growth trend in workplace traffic in the UK over the past year, nearly six times greater than the growth observed in the US during the same period. From January to November 2021, workplace foot traffic in the UK increased by 450%, whereas the US only experienced a 60% growth in this regard.
Furthermore, data illustrates a stark contrast in office occupancy trends between the United States and Europe. In the U.S., office occupancy has remained relatively stagnant as of 2023, hovering at 40% to 60% of pre-pandemic levels, with variations by month and city, according to JLL. In contrast, Europe has seen a substantial return to the office, with attendance ranging from 70% to 90%. In some major U.S. metropolitan areas, it has taken until recently for average office attendance to reach 50% for the first time since the pandemic began. UK workers–particularly in the financial sector–are returning to the office at a much faster pace than their US peers, indicating that the UK office market may continue to outperform its US and European peers in the years to come.
While Brexit initially introduced uncertainties, the market has demonstrated resilience and adaptability. London, as a global financial hub, bounced back with sustained investor interest, a deep talent pool, and favorable exchange rates for investors. Despite rising house prices, residential demand remained strong, and even the office market is outperforming its North American peers. In the face of challenges, the UK's real estate market remains attractive, offering stability and opportunities for investors and businesses.
—Mattis Dougray
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