As the spotlight shines on Birmingham hosting the Commonwealth Games this week, we’ve answered some of the key questions regarding the economic impact and how it will shape and boost the community of the city. Read on to find out everything you need to know about ‘Birmingham 2022’.

What is the purpose of the Commonwealth Games?

The Commonwealth Games has a notable reputation as the second most important international multi-sporting event after the Olympic Games. Comprised of 72 nations the Commonwealth represents one third of the world’s total population. It takes place across 11 days every four years and has over 5000 athletes competing in 19 different sports. The purpose of the event is to build peaceful, sustainable and prosperous communities globally by inspiring Commonwealth citizens through the ambition and impact of their athletes. Having first started in 1930, the Games have since put a spotlight on host cities and uplifted communities immensely through bolstering both economic activity and local area regeneration.

How have the Commonwealth Games affected economies?

Historically, host cities have seen tremendous economic growth and prosperity from the Commonwealth Games both in preparation for hosting it and, in the ripple effect, long after the spotlight has left the city. The previous Commonwealth Games was hosted in 2018 at the Gold Coast, Australia and contributed £1.2 billion to the economy. The improvement to infrastructure and new sporting facilities drove the development of related industries (such as engineering, construction and tourism), stimulating job growth across the region.

A new report by the Commonwealth Games Federation and PwC has revealed a consistent economic boost of over £1 billion across previous host cities as a result of the Games. Host cities have seen fiscal dividends from national, regional and other levels of government. In the UK, Manchester (host of the 2002 Games) saw £2.7 in investment from the national and devolved government for every £1 of local government spending on total Games-related expenditure, whilst Glasgow (host of the 2014 Games) saw £3 for every £1 of local government spending. The report also indicated that cities have seen up to a 25% increase in tourism in the three years after hosting as well as up to £400 million of Commonwealth investments and trade deals. The Games have both built and showcased Manchester and Glasgow’s economic profiles and catapulted interest in the vicinities as desirable locations to live and work.

What is the impact of the Commonwealth Games on Birmingham in 2022?

In December 2017, Birmingham was awarded the rights to host the 2022 Commonwealth Games, the largest sporting event in the UK since the 2012 Olympic Games in London and certainly the largest to ever come to the West Midlands.

Like Manchester and Glasgow before, the Birmingham Games has been a catalyst for investment both directly and indirectly. The city secured a £778 million investment for hosting the Games, and Birmingham City Council estimated around 4,500 jobs were created as a result.

In terms of major regeneration hotspots, the Alexander Stadium has received £72 million worth of redevelopment and been upgraded to hold 40,000 spectators for the Games. The city centre has been renewed with £25 million invested to revitalize public spaces and improve security measures at 19 locations. Infrastructure has seen immense improvement with £500 million spent on roads, rail and cycling routes in the vicinity of Perry Bar where the Games will be hosted. 5,000 homes are also expected to be newly built.

The Games will also generate additional revenue through ticket sales, sponsorship, merchandising and the sale of broadcast rights. The city will welcome over 1 million spectators from around the globe over the course of the 11-day event that started on July the 28th. Furthermore, 1.5 billion people are expected to tune in virtually to watch, elevating the city to the world stage.

How will the Commonwealth Games impact Birmingham property and rental prices?

The UK is currently experiencing a country-wide housing stock shortage and Birmingham is no different. Being so well located, the city has seen an explosion in house price growth and demand is set to further grow underpinned by the publicity of the Commonwealth Games.

Historically, there has been a direct impact of the Commonwealth Games on a host city’s property prices. Most recently, Glasgow saw a property price decrease of 8.6% in the five years up to the 2014 Games largely rebounding from the GFC but growth took a turn after playing host city and house prices increased a cumulative 27% up to 2019. Manchester, on the other hand, saw the strongest marginal change in growth when it hosted the Commonwealth Games in 2002. Prices had grown 63% in the 5-year lead up to the event but exploded to 140% in the five years after.

The future for Birmingham real estate investors is bright. In fact, JLL in their UK Residential Forecasts report, listed Birmingham as the city anticipated to see the highest price growth in the UK averaging 5% annual growth over the period of 2022 to 2026. Bolstered by the Commonwealth Games, the region will continue to see price growth due to increased connectivity resulting from the HS2 rail. The London to Birmingham leg will open in 2026, making the capital city commutable in under 45 minutes.

With extensive urban regeneration, stronger employment opportunities and better infrastructure, Birmingham is one of IP Global’s first choices when it comes to finding pockets of value. Take a look at our latest Birmingham property, The Silversmiths here.

What is Causing Inflation in 2022?

As global economies suffered from the consequences of the Covid-19 pandemic, central banks worldwide responded through quantitative easing policies by lowering interest rates to encourage lending and spending. For example, the US Federal Reserve dropped interest rates by 90%, from 2.5% to 0.25%, and the UK Central Bank decreased its interest rate from 0.75% to 0.1%. As a result, bank interest and mortgage rates dropped to historic lows. People were able to afford interest payments on more expensive homes. Additionally, demand for space had reached an all-time high as most people were bound to their homes during the Covid-19 lockdowns. These two factors combined resulted in a very rapid increase in the demand for housing, which resulted in extraordinary growth rates in prices over the past two years.

Public health policies have since relaxed and normal life has resumed. Economies have shown strong and rapid recovery, and consumer demand has returned. However, this recovery has been uneven, especially in Asian countries which seem to have fallen behind. China’s persisting zero-covid policy has disrupted global supply chains through production and distribution bottlenecks and the war in Ukraine and western sanctions on Russia have caused further supply chain disruptions, commodity shortages, and soaring energy prices. The first half of 2022 has therefore been characterised by a rapid resurgence in consumer demand, whereas the supply-side has fallen behind, causing consumer prices to skyrocket.

Will Inflation Persist and What is the Outlook?

Consumer prices in the US rose 9.2% in June 2022 compared to the same month in 2021. In the EU, consumer prices rose 8.6%, and in the UK, 9.1%. These elevated levels are well above the 2% target rates across these regions. As low unemployment rates and 2% inflation are the main targets of central banks, these central banks have rushed to reduce inflation rates through a reduction in spending by raising their ultra-low interest rates again. The following table shows the current rates and forecasts.

Though demand for goods is showing signs of a slowdown, demand for services continues to boom as the world begins to operate freely post COVID-19. For example, summer travel demand is far outpacing the supply of flight seats which has been heavily constrained through understaffed airports due to lockdown lay-offs.

The most important supply constraints are still ongoing, with no near-term end in sight for the Chinese zero-covid policy and the war in Ukraine. The expectation is, therefore, that inflation levels will stay elevated throughout the year and well into 2023. Interest rates will continue to increase in attempts to dampen demand until a better balance is reached, whilst simultaneously being constrained to limit the negative indirect effects on economic growth and the labour market.

How Should I Invest During Inflation?

As we are now navigating a high-inflationary environment, investors have been quick to shift across different assets. Equity valuations have dropped as interest rates have increased, with the S&P 500 benchmark down 20% since the start of the year - its worst performance in 52 years. Cash is currently losing its value rapidly at the rate of inflation. So which asset classes should investors look at? Real assets have historically performed well in high inflationary periods. Most physical assets retain their value during inflation surges, and houses tend to perform better than other comparable assets within this category. Historically, real estate returns tend to move in line with inflation and therefore act as a strong hedge as seen below.

Economists at Oxford Economics forecast direct corporate real estate returns and REITs to average around 7.6% per year over the next 5 years. This is well above their forecasts for the wider equities market (1.7% pa) and 10-year US Treasuries (1.6% pa). Moreover, compared to other real estate returns, the apartment sector is best positioned to weather the inflation storm, according to historical US data. Most analysed US cities had apartment returns that were relatively well insulated in times of nationally high levels of inflation, making them an attractive investment in the current economy.

Why purchase property if interest rates are rising?

Mortgage rates are still relatively low compared to long-term averages. Let’s take the UK as an illustration of where rates lie. At the end of 2021, mortgage rates reached a low of 2% and have climbed up to 3% for a 5-year fixed rate -35% below the long-term average of 4.1%.

As real estate values move closely in line with inflation and property prices are still rising, a potential 9.1% growth in value (in line with inflation) could essentially be achieved borrowed at only 3%. This would provide the purchaser with a steep negative inflation-adjusted rate of interest (-6.1%) which only occurs when the rate of inflation is greater than the nominal rate of interest (essentially a negative real interest rate). Investors are therefore currently likely to make real returns on their mortgage loans until inflation cools down.

Finally, US Dollar and the Euro are currently at parity for the first time in 20 years, with the Euro down 16% since this time last year and the Pound down 14% against the US Dollar over the same period. The strong US Dollar owes to two main factors: the US interest rates are relatively higher, and investors have been buying up dollars as a safe-haven asset. For many foreign currency investors, this means that UK and Euro investments are currently at a steep relative discount, which can provide investors with great value investments and a potential capital appreciation from just the currency upside once the Euro and Pound appreciate and return to their long-term averages.

If you're interested in taking advantage of currency saving in Europe and the UK, request a free consultation with an IP Global Wealth Manager here.

The economic history of a city has a significant impact on its future prosperity and development.

Today’s geographical distinctions across the UK can be traced back not just decades, but centuries.

Having made a substantial contribution to the industrial revolution, the North has long been referred to as the powerhouse of the UK. Cities such as Manchester, Birmingham, and Sheffield enjoyed an unprecedented boom throughout the 19th century due to vast amounts of raw materials such as coal and iron ore that could be found in these areas. This subsequently led to comparatively high wealth in the North, with Greater Manchester reportedly having the highest concentration of millionaires in the country at the time.

The Rise of the Northern Powerhouse

Throughout history, we’ve seen that property values provide an indication of the variation of affluence and economic performance across cities. At the height of the industrial revolution, property values and investment were relatively high in the Northern parts of the UK, making it a powerhouse of economic activity. The influx of people and businesses to cities in the North of the UK, such as Blackpool, Liverpool, and Manchester, propelled demand for housing which, in turn, rapidly increased property prices, with Manchester showing values that were more than double those of neighbouring cities and towns such as Warrington.

The second half of the 20th century was a difficult period for the North due to corporate restructuring and nationalisation within the coal and steel sectors. Coupled with deindustrialisation during the 1970s, these factors attributed to a gradual increase in unemployment and a downtrend in economic performance for many towns and cities situated in the North. As a result, property prices began to fall in the Northern cities, leaving it a far cry from its golden days as an economic powerhouse and investment hub in the 19th century. However, a sustained period of economic revival has rejuvenated the core cities in the Northern parts of the UK, such as Manchester, Sheffield, Leeds and Birmingham. As a result, an influx of people have begun to buy property again, leading to a substantial increase in property prices. Having turned a new chapter of economic investment and prosperity, the status of the Northern Powerhouse status is back from more than 200 years ago.

In 1997, the newly elected Labour Party introduced a fresh approach to reinvigorate areas, particularly those in the North, following the economic downturn of the 1970s. The decentralisation of government power to the lowest level possible and promotion of public-private partnerships laid the foundation for improvements in labour supply and investment in human development. It also gave new strength to the preservation of social capital and protection of the environment. New strategies focusing on education, urban renewal, economic development, social integration, and environmental reclamation were considered key to renewed growth of private enterprise, further investment in Northern UK cities and encouragement to buy properties. In order to do this and stimulate the Northern economy, over the past two decades, the government has implemented a series of programmes and strategies such as the Local Enterprise Partnerships (LEP), Housing Market Pathfinders, UK City Deals and, more recently, the Northern Powerhouse initiative, to invest in and develop the region.

The devolution of responsibility for enhancing economic competitiveness and social inclusion to the local level was pivotal to the North’s success. It has given local authorities greater flexibility to focus on local capital projects, such as transport improvements and urban regeneration. Early adopted strategies and government spending primarily focused on larger cities such as Manchester, Leeds, Liverpool, Sheffield, and Birmingham. This has provided prime ‘Northshoring’ locations for companies and people to relocate due to outstanding talent, affordability, and connectivity that these cities have to offer. As a result, property prices have increased substantially in cities such as Manchester (+383%), Birmingham (+243%) and Sheffield (+269%) since 2000, compared to the national average of 185%. Rental prices have also been trending upwards due to an undersupplied housing market and rising incomes. Nonetheless, the affordability ratio in cities like Manchester, Birmingham and Sheffield are all hovering between 5.6 and 5.9, while London is more than double that at 12.7.

In more recent years, initiatives such as the GBP7 billion Northern Powerhouse have focused on better connecting cities and regions to the North of England. The lack of economic and physical connections between core cities in the North with other towns and cities such as Bradford, Stockport, Wigan and Hull have been seen as a core issue in holding back growth and unlocking the true potential of the North. Urban renewal projects have been implemented, and the transition from an economy heavily reliant on manufacturing to one centred around service has resulted in strong economic growth in parts of Northern England.

Hull – The New Epicentre of Investment?

View of the business center of Liverpool through Queens dock, EnglandThe city of Hull, once a thriving medieval metropolis and England’s third-largest port in the 20th century, declined, as with most cities in the North, due to the economic challenges in the 1970s. After a prolonged period of economic decline, it wasn’t until 2013, when Hull was included in the second wave of the UK’s largescale investment plane ‘City Deals' and later in 2016, the ‘Northern Powerhouse’ initiative, the city’s prospects began to turn. Until this time, many government initiatives had focused on England’s 8 largest cities (outside of London), such as Manchester and Birmingham.

Hull was named the UK’s City of Culture in 2017 and was declared the third-most improved UK city in 2018. The city has also seen significant economic development under the ‘Northern Powerhouse’ initiative, with thousands of jobs being created and unprecedented levels of investment totalling GBP3 billion to date. It’s quite evident that Hull is evolving from a city heavily reliant on trading and seafaring to one that is being built for the future. The city’s prime economic and geographic location on the Humber Energy Estuary has placed it at the centre of new and emerging industries in the UK - particularly in renewable energy. Health Technologies, Pharmaceuticals & Healthcare, Knowledge, Digital & Creative, Manufacturing, and F&B are among the other prominent sectors that make up the backbone of Hull’s economic resurgence.

A Property Playground

Despite being one of the UK’s most affordable locations to buy property, Hull’s growth in property demand is underpinned by the city’s burgeoning economy. Improved transport links and various regeneration projects within the city are creating an influx of investments that is attracting businesses, and creating further employment opportunities in the city, particularly in the fields demanding high skills, such as renewable energy, advanced manufacturing, healthcare and digital.

The city has been unable to meet the growing property demand and, as a result, an undersupply of 26,896 units could persist by 2032. The undersupplied housing market and rising incomes have put significant upward pressure on house prices and rents in the city. However, house prices still offer tremendous value for money, currently an incredible 46% more affordable than the average UK city.

Once again, we are seeing how property values are providing an indication of the affluence and economic performance of a city. Hull’s house prices have increased by 34% since 2010 and are expected to rise by a further 41% by 2035. Similarly, rental prices in Hull have increased by 26% since 2015. Despite the significant rise in housing and rental prices, Hull still remains an attractive prospect when it comes to buying property in the UK as investment continues to flourish under the ‘Northern Powerhouse’ initiative. The city also boasts many fast-growing industries that will continue to play a larger role on a global economic scale.

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