Weak Sterling creates investment opportunities for UK student housing
It is now five months since Britain’s Brexit vote and its decision to leave the EU. The UK stock market fell sharply in the aftermath of the vote, but, as of the end of November, it has broadly recovered to its level immediately before the referendum.
Nevertheless, the British Pound has fallen to historic lows. As a result, British domestic investors, as well as global investors, are now looking closely at opportunities for investing in UK real estate.
Uncertainty about the economic outlook post-Brexit
While stock prices suggest a relatively sanguine outlook for the UK economy, the underlying uncertainty over future prospects remains deep-rooted.
The sell-off in sterling is indicative of this. The pound sold off sharply after the vote, with the exchange rate versus the yen plummeting from around 160 yen to 133 yen.
Most recently, it is trading around 140 yen. Compared to its peak last year at 195 yen, the UK currency has fallen by about a third.
Sterling’s peak value over the past 10 years was £1=251.7 yen (in 2007). Compared to this, the current level is about half of its historic peak.
The fact that the British pound is 50% cheaper than the yen means that sterling-denominated goods can be now effectively be bought at half the price they used to be.
For the Japanese, this is actually a once in a lifetime opportunity. Hence, the need to highlight UK real estate, especially student apartments, as a key investment opportunity right now.
A major opportunity for Japanese investors: Steady demand for student apartments
The UK real estate market had been trending upward until Brexit, primarily reflecting a lack of supply.
Real estate prices have soared as a result, especially in central London, with rents also rising sharply.
In the UK, the majority of universities receive public funding, which means problems such as university bankruptcy or major campus relocations are rare.
There are only about 150 universities in the UK, compared with 4,200 institutions in the United States, and 800 universities in Japan.
Moreover, this number has not increased much in the past 20 years. In fact, the actual business of managing universities in the UK has remained remarkably stable, compared to Japan, for example, where university numbers have increased by around 350 over the past 20 years, against a backdrop of a decline in the number of students.
The balance between supply and demand in UK real estate is anticipated to remain broadly stable, with demand for student accommodation well-underpinned.
Against this backdrop, sterling has fallen by nearly 50% compared to its previous levels. This is a great opportunity to buy UK assets.
The attractions of UK real estate
Stasia Capital is an overseas real estate investment and development consulting as well as asset management company.
Its real estate business operates across Europe, North America, Asia and the whole world. In the UK, Stasia Capital’s current focus is on the lucrative student accommodation market.
The company is currently developing properties in Luton (with a population of 300,000 people), a commuter town 20 minutes from London by train, and Liverpool (population of 1.1 million people), 2 hours away from London by train.
It has chosen these two locations because there are a number of universities in these areas, namely Bedford University and the University of Liverpool.
Here are the advantages of investing in UK real estate at the moment
The market is cheap compared to previously
A typical property is 10 million yen, a reasonable valuation compared to before. In addition, sterling’s decline enhances the affordability of the market for overseas investors.
The risks of solely investing in yen assets are clearly apparent. Investing in sterling assets is a convenient way of spreading your investment risk.
100% LTV (full loans) available if conditions are met
With demand for funding being quite low at present, 100% loan financing is possible.
Things to watch out for
However, investing in UK property is not without risks. For example, a smooth exit is not guaranteed. Depending on the outlook for the UK economy at the time of sale, if liquidity is low, your exit price may fall short of expectations.
There is also the exchange rate risk. If the yen appreciates, in yen terms your rental income or exit proceeds will be smaller once the currency is converted.
You can now buy real estate 30% cheaper than a year ago
One of Stasia's investment plans for property located in Liverpool is a prime example. A room of 25m2 is currently priced at £84,950 pounds. This equates to around 11.9 million yen at a conversion rate of 140 yen.
But at the 2015 peak of 195 yen, the equivalent price was 16.56 million yen. The same property is therefore 4.66 million yen cheaper than it was previously. This is highly attractive, offering a net investment yield of 7.5% over 3 years.
Following the results of the US Presidential election in November, with heightened expectations for a change in US economic policy under the president-elect, and a Fed rate rise on the cards for December, the yen has weakened to around 110 yen against the US dollar.
From the point of view of spreading risk through overseas investments, it seems reasonable to expect a selloff in overvalued currencies and a recovery of currencies which have been oversold. For Japanese investors, therefore, now seems like an ideal time to buy undervalued UK assets.
Even if the UK eventually leaves the EU, it is unlikely that the number of entrants to the country’s prestigious universities, with their tradition and history, will decline sharply.
In fact, the opposite could well happen, with the tailwind of a cheaper currency prompting an increase in overseas students.
Thus, we believe it is unlikely that the UK real estate market, in particular rents and property prices for student accommodation, will see any significant decline.
With the UK economic outlook currently clouded by Brexit-related uncertainty, now looks like a highly attractive opportunity to invest in UK assets.
Learn more about affordable UK real estate here.