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.

Will interest rates rise in 2022? Can I secure a mortgage if I'm self-employed? How has COVID-19 impacted lending? To gain insight on what to expect next year in the mortgage market, IP Global interviewed Rebecca Pickard of Liquid Expat. The Senior Mortgage Consultant answered the most frequently asked questions specific to bank and mortgage interest rates, the availability of expat products, and the ease of securing a mortgage in 2022.

1. Do you expect to see bank interest rates rising in 2022?

There have certainly been more 'hints' on rate rises in the last few weeks. The Monetary Policy Committee (MPC) voted against a rise in early November as they said there was "value" in waiting to see how the jobs market coped with the end of the furlough scheme. However, they have not ruled out a rise in December – they meet every six weeks (or eight times a year to be accurate) and whilst no date has been marked for a rate rise, there does seem to be more indicators that a rate rise could happen at any time now due to a surge in inflation. It has to be reminded that there has never been a period in history whereby the BOE and mortgage finance interest rates has ever been this low.

2. Do you expect to see more or fewer products available to expats in the next 2/3 years?

Over the past three years, there has been a constant increase in expat products on the market, and I see no reason for this to change – an increasing number of lenders are becoming more comfortable in the space and are offering a broader selection to applicants living overseas. Over this period, this has resulted in higher loan to values being available to apply for, lower interest rates and more wide-ranging lending criteria for British Expats and Foreign Nationals.

3. Is it harder to get a mortgage buying via a company even if I’m the sole director?

No, the application process is very similar, so it’s no harder to obtain the mortgage versus purchasing in a personal capacity – not all lenders will lend to an LTD company structure, so it’s just about knowing which providers are able to assist, but that is where LEM come in. It is always prudent to get independent tax advice on the positives and negatives of obtaining mortgage finance inside an Ltd company versus in your personal name.

4. Can I get a mortgage if self-employed?

Yes, absolutely, albeit the number of lenders willing to accept is smaller versus someone on a full time employed position. One reason for certain lenders not accepting self-employed applications is the additional lender and underwriter resources required to clarify their actual self-employed earnings. If you are self-employed, the more independent verification of your earnings/company profitability via an accountant the lender can obtain, the simpler the process will be with any lender.

5. If I own other UK property already is this a help or hindrance to getting another mortgage?

It can be a help as some providers would prefer applicants to have landlord experience or a history of making mortgage payments in the UK. That being said, we work with plenty of lenders who can help first-time buyers. The finance options that are available to first-time landlords/buyers often offer very reasonable rates and terms.

6. Where do I find the cheapest mortgage?

You speak to Liquid Expat (LEM), we have the most extensive panel of Lenders, and these include UK High Street Banks and Buildings Societies, UK Private Banks and Lenders that are based offshore. We have exclusive products/fees with a range of providers and so can help clients obtain the best possible product for them with many of the products not available either directly to the public or through other brokers.

7. How do I choose whether to pick a 2/3/5-year tracker or fixed rate? What’s the difference?

Again, that is what LEM is for; we can help establish the best product for each client based on their individual circumstances – lots of things can impact the decision; the rate itself, if a client will relocate to the UK in the future, future plans with the property etc.

A tracker mortgage is a variable mortgage linked to the Bank of England base rate. Typically lenders will apply a certain % over above this, i.e. 2.89% + Bank of England base rate. The Bank of England’s base rate can fluctuate – it is currently 0.1%. Therefore your mortgage rate would increase if the external Bank of England base rate goes up; this leaves a level of uncertainty for borrowers. If interest rates go up, the amount they will need to pay on their mortgage could increase to an unaffordable level.

A fixed-rate mortgage has a fixed rate of interest for an agreed period of time during the mortgage term, i.e. a 2/3/5 year period. Some homeowners prefer the predictability of knowing that their rate is secure with a fixed mortgage, as this means that the amount they pay on their mortgage will stay the same throughout. This can result in some people paying more on their mortgage than if they had opted for a tracker mortgage, but this is not always the case.

There are also options for taking finance whereby you can obtain the security of having a fixed rate product without any early repayment charges for paying off the whole of the finance inside this period without incurring any penalty whatsoever. This is often attractive to someone who wishes to take advantage of both the five years fixed rate security but having the option to sell or refinance the property within this term and incurring no penalty costs. 

Why You Should Invest In Commuter Town Property Near London

2021 has been a year of uncertainty for many prospective homeowners – but there is always opportunity in crises. After three successive lockdowns and in the midst of a largely successful vaccination programme, the effects of Covid-19 on the UK property market are beginning to materialise. Now more than ever, renters, homeowners, and buy-to-let property investors are looking further afield than “prime” London property as commuter towns become much more appealing property choices. These effects are so pronounced that while rental prices of prime London property fell by 8.6% y-o-y, commuter zone prices rose 5.4% over the same period.

At IP Global’s virtual round table event of over 400 registrants, investors echoed this trend: almost a quarter would now consider investing in commuter town property rather than prime city-centre locations. The underlying cause for this is undoubtedly pandemic driven. However, there is significant evidence suggesting that changes are more than just short-term fluctuations and point to a massive shift in lifestyles after lockdown. With London’s economy accounting for almost a quarter of the Nation’s GDP, it’s hardly a surprise that the commuter town property near the Capital is drawing most investor interest.

 

Covid-19 has impacted rental decisions

One of the most pronounced impacts of the pandemic has been the way we work. By April 2020, 46.6% of workers in the UK transitioned to a work-from-home routine at least temporarily – 86% of which was a direct result of Covid-19. Many businesses intend to make these routine changes permanent, and, together with the effects of several lockdowns, the appetite for property in key central business districts is dwindling. Instead, people are starting to look for property in commuter belt towns and nearby areas where rent and property prices are cheaper, and space is abundant. Rents in prime areas fell by an average of 1.3% in only the third quarter of 2020, while commuter zone prices instead rose by 1.2%.

 

Property prices are rising the most in commuter belt areas

As the pandemic swept through the UK, a “halo effect” has emerged with property prices. As growth started to slow in the centre of the UK’s capital city, it steadily increased in most commuter belt towns. According to the Office for National Statistics, property prices in London grew by only 4.6% in the 12-month period ending February 2021. This is significantly lower than the 8.9% annual price growth across England, let alone commuter belt areas like Broxbourne where prices rose upwards of 11.0%. Unsurprisingly, commuter towns like High Wycombe, Peterborough, St. Albans and many more are gaining a significant level of interest from buy-to-let property investors, renters, and homeowners alike. So why exactly is the commuter zone suddenly getting all this extra attention?

Commuter town properties are more spacious

Without there being a necessity to live in the prime areas of London, commuter zone properties have piqued the interest of many more. For those who have fully or at least partially transitioned into a work-from-home lifestyle, space both inside and outside the home is essential. Commuter town properties offer just this: the further out from the centre of London you travel, the more space you will get for your money.

 

Commuter belt towns are more affordable

Another advantage of commuter belt towns is that they are, in general, more affordable than property in London itself. Some of the top commuter towns like Cheshunt, Waltham Cross, and High Wycombe have average property prices of £384,248, £390,612, and £331,092, respectively.

 

Changes are likely to stay for the foreseeable future

There is a substantial argument that the “halo effect” of property prices is here to stay. With routine changes like work-from-home policies proving effective, many of the fears that prevented them from happening long before the pandemic have been dispelled. This is not only echoed in the UK but all over the world where people have had to push the boundaries of technology and find that, actually, most office work-related activities can be performed and measured remotely.

 

As more concrete work-from-home and flexi-work policies are adopted across industries, real estate in commuter zones is becoming an ideal buy-to-let investor’s market with strong rental and capital growth prospects. In fact, homes are letting up to 30% faster when compared to pre-Covid-19 times, making them a great choice for prospective property investors.

 

Final thoughts…

With more and more of London’s workforce exploring the city’s outer reaches for more spacious and affordable property, prices are bound to increase. Data has already begun to evidence this trend, suggesting that those looking to invest in property should get in on this market before prices settle at a new, higher norm.

 

If you have any questions about property investment in the UK, do not hesitate to leave us a message or catch up on the property latest news and insights here.

Think you know the basics of property investment? Think again.

Here are four common mistakes people make when starting out.

Expectation: You need to buy a property that you would be willing to live in yourself.

Reality: You need to focus on the fundamentals and where you can make some money.

If you’re purchasing a buy-to-let investment, you won’t live there. Counterintuitively, often the best places to invest are not necessarily the nicest places. These are the areas undergoing regeneration and improvements to infrastructure, which will drive up value.

It can be difficult to decide to invest in areas that perhaps you yourself wouldn’t want to live in. But ultimately, you’re looking to the future and what it will be like then. When looking at some of the less-desirable areas that IP Global has invested in over the years, there’s no question that they have performed the best in terms of price growth. So, it is essential that you try to focus solely on the numbers and remember that this is purely an investment decision rather than a place you might end up living in.

 

Expectation: It is better to buy in cash rather than to take out a loan.

Reality: Taking out a loan can increase your returns exponentially.

Many people are scared of the word ‘debt’. Regarding property investment, however, debt can increase your returns exponentially. Investors who take advantage of banks willing to structure loans at cheap rates are the ones who become truly wealthy building up leveraged property portfolios. Take a look at this example:

Investor A buys an apartment in cash worth £250,000.

• Assume average appreciation of 5% p.a. for 6 years
• Apartment is now worth £325,000 (30% increase = £75,000)
• Rental income is £1,000 per month, resulting in £12,000 (4.8%) p.a. or £72,000 over 6 years.

Total Profit = £147,000

Return on Investment is 58.8%

Investor B invests in an apartment worth £250,000 but takes out a 70% mortgage. The split is therefore £75k : £175k Equity to Mortgage.

• Assume the same average appreciation of 5% p.a. for 6 years
• Apartment rents out at 4.8% yield while the mortgage interest rate is at 4%
• Apartment is now worth £325,000 (30% increase = £75,000)
• Rent covers mortgage = Cash flow neutral

Total Profit = £75,000

Return on Investment is 100%

 

Expectation: Yields are everything.

Reality: Your primary target can, and should be, a combination of both capital growth and cashflow.

Your rental yield is simply the annual rental return, calculated as a percentage of the property’s purchase price. Prime locations with high levels of demand and resultingly higher property prices will tend to have lower yields, compared to other less central locations. Yield is therefore often a reflection of risk, and lower-yielding prime markets are typically more secure.

However, there are other key factors to consider that make for a solid property investment. For example, a location experiencing strong population and economic growth, combined with an undersupplied housing market make a compelling case for investment.  Also, choosing a location with a low vacancy rate will ensure there’s no oversupply of rental properties on the market, this will keep void periods to a minimum and support rental growth.

So, at the end of the day, if you’re in it for the long run and your primary focus is capital growth while being relatively risk-averse, choose a property in an established high-demand location. However, if your focus is cashflow in the short term, yield plays a much greater role in your investment decision.

 

Expectation: You need a substantial amount of equity upfront to invest in property.

Reality: There are ways to structure your investment plan so that you need less capital upfront.

Depending on the percentage of your investment you can get mortgaged (typically around 70%), you can drastically reduce the amount of equity to go ahead with your investment through joint-ownership. You have the option to invest with up to four people, which can reduce your equity required to as low as 5% of the property value.

If you’d like to find out about more property investment myths debunked, check out out our guide, 关于房地产投资的 10 条真理.

If you are considering investing in property, a typically resource-heavy asset class, working with a property investment company can save you many headaches while still allowing you to maximize profits and diversify your portfolio. Whether you are a new investor looking for guidance and a secure way of entering the market, or you are an experienced investor looking for a hands-off investment opportunity, property investment companies offer a range of advantages for all types and profiles of investors.

Unfortunately, though, not all property investment companies have the same experience or can guarantee the returns they claim to. Many lack experience, have market presence in a limited number of locations, or don’t have strong track records.

To find the best property investment company for you, it’s vital to make sure that they are worth your time and your money. To do so, ask yourself the following 4 questions before sealing the deal. If you can confidently answer yes for all, you’re likely on the right track.

1.  Do they have an international presence?
2.  Do they have a successful track record of completed projects?
3.  How transparent are they and do they achieve their yield and rental estimates?
4.  Are they well-established?

1. Do they have an international presence?

A property investment company’s single most important goal is to create wealth for a client through property. The property’s purpose is merely to act as an investment vehicle for steady rental income and strong capital appreciation.

Choosing a property investment company with an international presence means they will have access to the most promising opportunities across the globe and not be hampered by the confines of one region or country. Take IP Global for example, we have brought to market 5,500 units across more than 45 cities across the globe.

Finding a company that deals with properties in different markets around the world also means that if you decide to invest in other emerging markets, you can stay within the auspices of the same company – one that you have already built trust and a relationship with.

2. Do they have a successful track record of completed projects?

The reality is that property investment is not simple, and the construction process can be complex, particularly when investing in a foreign country.

Look back at previous projects undertaken by the property investment company and ask: were they completed? When bottlenecks occurred, did the company try everything to protect their clients’ investments?

If the company can show you plenty of examples of properties that they have invested in, and -more importantly- that when things went wrong, they persevered, this is a good sign. You’re not investing a small amount; you need to be certain that you’re putting your equity in responsible hands. One sign to look out for is if the company has any tangible stake in the investment too, that way you can be assured they will do their best to ensure its success.

Furthermore, your chosen property investment company should have a good track record when it comes to vacancies. Smaller companies or those with less experience sometimes struggle to find tenants for all the properties they’re managing – which results in potential lost income and other complications for your investment down the line.

3. How transparent are they and do they achieve their yield and rental estimates?

Some newer property investment companies will often lure in potential investors by near-unbelievable yields and rental prices that they claim they can achieve. This is all meaningless unless they have evidence to back their claims.

Always ask your property provider for proof, and client testimonials, to back up the claims they’ve made of their investment outcomes. This not only provides peace of mind but shows you that the company is transparent. At IP Global, we are happy to say that to-date we have achieved 105% of our rental estimates, we always err on the side of caution with our projections.

Your property investment provider should also be fully transparent with the investment journey and offer educational resources like research reports, guides, and advice on exit strategy, empowering you to make smarter decisions. In this regard the company should employ a strong investment and client services team for the company’s financial success to truly depend on yours. Reach out to the company or see if you can find these resources online before falling in love with a particular property.

4. Are they well-established?

Lastly, you should always consider if the company is well-established and experienced in the market they're operating in. How many years have they been active? How much experience have their consultants got? It's important that they have a diverse and solid skillset that enables them to navigate the complicated real estate industry and deliver strong returns.

These questions need answers before you sign a contract and put your hard-earned capital into their hands. When investing in property, particularly if buying off-plan, the more time a company has been around the better. Be sure to check how experienced the team is in your particular market too. For example, a company well-versed in UK property might have only just expanded into Portugal – meaning their experience in that market is likely very limited.