What does 2023 have in store for real estate investors?
The real estate market remained firmly in the spotlight throughout 2022 and no more so following the government’s disastrous September 2022 mini-budget that saw interest rates soar and mortgage lending requirements tighten.
Now as markets begin to settle down and we start a new year, investors will be hoping for a more settled and steadier 2023. Yet with a cost-of-living crisis driven by stubbornly high inflation and rising interest rates, investors and landlords are likely to face a mixed 12 months.
Here, Jennifer Williamson points to six things that will shape the property investment market in the year ahead.
House prices fall and rental demand increases
House prices are predicted to fall between 5% and 10%, ending a 12-year boom. Any fall will naturally vary around the country and will be attributed to rising interest rates and uncertainty around buyers’ abilities to meet household bills.
At the same time, demand for rental properties, particularly in Greater London, remains high. Property portal Zoopla reports a 48% increase in rental demand in the capital, with rents increasing by up to 13%. It is, however, predicted that London rents will stabilise over the next 12 months.
Investors seeking both capital growth and rental income will look to the longer term, and with yields predicted to remain at around 4.7% for 2023 are likely to tough out any correction in the housing market.
A fall in house prices also represents an attractive opportunity for cash-rich investors to build their portfolios and we expect to see portfolio growth throughout the year.
Demise of accidental landlords
Many accidental landlords – those that decided to hold on to property rather than sell following, for example, marriage – chose to exit the market in 2022 following increased regulation and diminishing returns.
That desire is likely to continue throughout 2023 yet accidental investors may struggle to sell. Falling house prices, and a lack of mortgage products for buyers may tempt them to hold on for a little longer.
Those looking to sell should however keep in mind planned changes to capital gains tax, with annual allowances falling in April this year and again in 2024. Any delay in a sale will see investors paying more tax.
A saturated holiday lets landscape
The boom in staycations in 2020 and 2021 is passing, with increasing numbers looking to the guaranteed sunshine of an overseas holiday. It may leave investors who barrelled into the holiday letting market facing difficult decisions as property sits empty for longer periods.
Yet there is a glimmer of hope for holiday let investors in 2023: the cost-of-living crisis may deter families from expensive summer holidays and look to the UK instead. But it is the ‘scroll-stopper’ homes that will benefit the most and command a premium. Holiday let owners may need to drop rates on their properties to compete and attract bookings.
Investors with holiday lets will want to consider their occupancy rates and returns, not forgetting to take into account the time investment needed to market those properties and turnaround periods.
The UK remains an attractive destination for wealthy overseas investors looking to put down a footprint. London remains a big draw, but investors are looking to other locations on the outskirts of the capital and in our other fast-growing cities. A weak pound will continue to attract those with cash to invest.
However, recent changes to the tax regime and an increasing drive for greater transparency surrounding property ownership will deter some. And then there is the question of a looming general election in 2024 and a change of government. Policy announcements from the Labour Party will be closely scrutinised.
The commercial property landscape remains complex and fragmented and will remain so throughout 2023.
Retail and hospitality continue to struggle with some 47,000 shops reportedly closing in 2022. Landlords often struggle to find tenants for empty units, yet, changing working patterns are in some instances breathing new life into commuter-friendly towns driven by independent retailers. Not all will feel that benefit.
The office market remains unclear as employers continue to grapple with changing working patterns. Investors holding older office stock will look to repurpose or redevelop buildings with employers wanting modern and more flexible spaces.
Smaller and light industrial units, however, continue to show promising returns.
Finally, and more a certainty than a prediction, are changes to the tax regime that will impact investors.
Corporate tax rates will increase from 19% to 25% from April this year. For individual investors looking to cash in will find tightening reliefs on capital gains tax, with the annual allowance to be halved from its current £12,300 this tax year to £6,000 and again to £3,000 in the tax year 2024/25.
Yet the uncertain property market can also provide tax planning opportunities. Generational gifting or transferring of properties is a possible was to mitigate exposure to future inheritance tax bill can give rise to capital gains tax charges. With lower property values, these capital gains tax charges are likely to be lower.
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