Recent turmoil in China’s financial markets have rattled investors across the globe. Could this slowdown have an effect on landlords and property investors in the UK?
A collapse in Shanghai’s stock markets on 24th August – the biggest since 2007 – triggered a second ‘Black Monday’, causing financial markets across the world to fall.
The UK’s FTSE 100 Index, which tracks the share performance of the 100 largest companies listed on the London Stock Exchange, lost £84 billion, whilst the Dow Jones ended the day with a 588 point deficit.
Investors are still jittery
China’s central bank, the People’s Bank of China, made interest rate cuts and flooded the Chinese economy with emergency funds to counter the slip, which caused Western markets to bounce back. However, August remained one of the worst months for the FTSE in over three years.
Despite the protection mechanisms in place to stop panic ‘fire sales’ of shares – a traditionally risky asset – investors remain wary of more fallout. As Chinese stocks continue to fall, global markets remain turbulent – with the latest data showing that the FTSE is continuing to slip downwards 1.
China’s slowdown could stall UK interest rates
As the world’s second biggest economy, China is likely to cause growth to slow globally.
Though Bank of England Governor Mark Carney has implied that the date at which interest rates rise (last hinted to be on the cards at the beginning of 2016 2) will not change, some economists think otherwise; certain commentators predict that a rise may not occur until midway through next year, and could even be pushed back until 2017 or beyond 3.
If this happens, it could mean lower mortgage rates for longer, allowing investors to continue to purchase property at low costs. This would likely also result in stronger demand, pushing prices upwards and facilitating further capital growth for existing landlords.
Effects on the prime market
Chinese investment is a strong driving force behind the high-end London property market, and there is a possibility that this market will cool as those adversely affected by the Shanghai crash have less to spend over here.
So far, however, reports indicate that the opposite is true, with estate agents reporting that interest has in fact risen, with Chinese investors seeking to diversify their portfolios and invest more in safer, less volatile assets such as UK property.
Bricks and mortar remain a safe bet for many
As property is typically a long-term investment, it is far more resilient to short-term volatility in financial markets. In fact, much of the rise in the popularity of buy to let can be attributed to the underperformance of shares and share-linked investment schemes.
Property can still be a good investment because:
- The private rented sector is growing. The number of private renters in the UK has doubled in the last 20 years and private rental is now the second largest tenure in the UK, accounting for nearly a fifth of all households 4.
- Rents are expected to rise. Forecasters expect UK rents to increase by 2.2% in 2015 and continue on this upward trend, increasing by 12.1% in total by 2019 5.
- Property prices are expected to rise. Industry experts predict that UK house prices will increase by an average of 19.3% over the next five years. The East and South East are expected to see the largest gains, with the East and West Midlands and South West of England following closely behind 6.
- The buy to let market is strong. Despite recent tax changes and the threat of interest rates increasing, value and innovation in the buy to let marketplace is growing and the number of products available is on the rise. In May 2015, buy to let accounted for 28% of gross residential mortgage lending, and had grown by 22% in the preceding 12 months – compared to a drop of 15.8% in the owner-occupier sector 7.
Landlords have little to fear
Andrew Turner, director of Commercial Trust, believes that property investors have little to worry about.
“Assets such as gold, bonds and indeed property are safe havens for investors who do not wish to overexpose themselves to the traditionally volatile stock market.
“Buy to let landlords typically invest for steady, long-term gains and therefore should not be affected by the peaks and valleys that shares see on a day-to-day basis. If anything, the recent turbulence could convince more people of the relative security of bricks and mortar.
“Buy to let remains a sensible, viable investment for those who play it right. By remaining as educated and informed as possible and seeking professional advice where appropriate – be it financial, legal or tax related – investors can maximise their chances of retaining a profitable asset that will weather any short-term economic storms that crop up.”
- Grote, D. and Lobo, D. “FTSE losses deepen on fresh fears over China”. Citywire Money. 1 Sep 2015.
- Peston, R. “Carney: UK interest rate rise on agenda despite China woes”. BBC News. 29 Aug 2015.
- Allen, K. “What will China’s black Monday mean for the UK?” The Guardian. 30 Aug 2015.
- “English Housing Survey headline report 2012–13”. DCLG. Retrieved from www.gov.uk on 2 Sep 2015.
- “UK residential forecast and risk monitor, February 2015”. Knight Frank. Retrieved from www.knightfrank.com on 2 Sep 2015.
- “Residential Property Focus 2015, issue 2”. Savills. Retrieved from www.savills.co.uk on 2 Sep 2015.
- “House purchase lending up slightly in May”. CML. 14 Jul 2015.