Essay: Investment in property during Brexit

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CHAPTER 1

INTRODUCTION
1.1 Background and Problem Statement
Investing in property is a big business that can become highly profitable. There are main two types of property investment, which are buy-to-sell and buy-to-let. Buy-to-sell investment involves property development activities such as renovation and re-lease or selling of existing buildings in order to make a profit in short-term (Congress Ltd 2018). On the other hand, buy-to-
let investment includes purchasing a property to renting out with long-term goal of rental income and capital growth (Ibid). In the UK, real estate is significantly important for feature of the economy. UK property market is the second largest in Europe after Germany and according to Ipf.co.uk (2017) research; the commercial property market in the UK has a market size of £883 billion in 2016. Moreover, foreign investors play an important role in the UK’s property market, especially in London. In 2012, foreign companies and
individuals invested nearly £20 billion in UK real estate market (Ibid).
1.2 Business Opportunity Identification
There are many opportunities investing in the UK property. First of all, UK population increases by 0.8% per year, therefore, rises in immigration and population UK faces shortage of housing supply (ONS 2017,e). Secondly, limited available lands and policies designed to protect green spaces has increased value of the property. As a result, demand of house increases faster than supply, which leads house price to go up in the UK. Another reason is that the UK is part of European Union (EU) and has a strong and high growth of economy compared to EU countries (Brianchon 2017). Therefore, strong economic environment, favorable property taxes, growing property values and increasing rental market gives an opportunity investing in the UK property (Bartonwyatt.co.uk 2018).

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On the other hand, there are some problems increases uncertainties to invest in the UK property market. Firstly, increasing number of local and foreign investors in property, UK now facing shortage of housing supply, reasons include rapid population growth, competing land use, migration and increased property owners (Kollewe 2017). Therefore, UK government has already started to tackle this housing crisis by toughening up buy-to-let mortgages and rising stamp duty land tax for more than one property owners (Ft.com 2017,a). Another problem is that, since UK has decided to leave EU members, uncertainty of housing market has increased and prices of houses has decreased such as London by 15% (The Guardian 2018). Therefore, influence of the UK property market will largely depend on definite outcome of the negotiations with the EU. Overall, problems that mentioned such as tax concerns and uncertainty of Brexit negotiations will be important factor to identify whether property development business in the UK will be profitable.

1.3 Justification of Research
Justification of the research includes business, academic and personal motives as follows:
1.3.1 Business Justification
The awareness of housing in the UK combined with increasing value of property especially in London region. Moreover, Britain’s decision to leave EU has decreased London house price and at same time value of the pound sterling has weakened. Therefore, decreasing house price and weak pound sterling value against dollar will benefit foreign investors. In addition, London
has a strong demand on housing and market forecast is expected to return to growth, this gives opportunity investing in London houses. Overall, growing demand on housing and in strong economic environment with favorable tax system gives attention to many investors. Therefore, developing property in London market such as refurbishment, conversion and new build apartment
by adding value could be a good potential business opportunity.

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1.3.2 Academic Justification
In order to develop a successful business, it is important to understand the current market, classify target customer and deliver product or service in order to meet customer needs (Johnson 2000). Thus, drawing a particular business plan for property development in the UK, clear understanding of housing market is required by analyzing house price determinants, economical drivers and factors that influence to the market.
1.3.3 Personal Justification
This research will give opportunity to gain understanding and increase knowledge of UK housing market in the perspective of property development business. In addition, the researcher is planning to implement this proposed project in real life practice. Therefore, this could be the greater benefit to access insight of growing real estate business environment in order to practice and cope with property development business in the future.
1.4 Aim and Objective
The aim of this research project is to explore UK property market and create a business plan considering to property development in the UK.
Objectives:
– Opportunity of investing on the UK housing market will be identified and appropriate business plan will be developed.
– Information will be extracted from available secondary data on housing market, economical and demographical statistics and primary
data will be extracted through interviews and survey.
– The data from both sets will be analyzed in order to create a business plan.
– Assessing impacts of risk factors into a business plan as an awareness and defining the exit strategy.
– Lastly, identifying main time-management strategies in property development.

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1.5 Definition of What Make the Project Entrepreneurship or Innovation Related
This practical project is more entrepreneurship related and at the same time innovation related. In order to define what makes this project entrepreneurship and innovation related, theory of entrepreneurship presented and correlated to the project. There are no specific definitions of Entrepreneurship, which meanings arise from diverse viewpoints of many scholars. The theories of entrepreneurship are grounded on economic factor, sociology and psychology understandings and some look at it from the management perspective (Bula 2012). According to Shane and Venkataramn (2000), a concept of entrepreneurship occurs when opportunities are recognized and exploited to bring about fulfilling the desires by the formation of new product or services in the society. Moreover, strong characteristics such as risk-taking, pro-activeness, innovativeness and resource leveraging help them to be recognized in business industry (Morris et al. 2002). The business idea is developing a property that includes refurbishment, new build, conversion and so on and many entrepreneurs have practiced this. In property development, finding property in right location and investing your money with the hope of profit is a risk taking, which indicates this project is more related as entrepreneurial. Looking at on management perspective, this practical project can be considered as innovation related, because leveraging resources is crucial aspect in property investment. For instance, using a solicitor, builder, and letting agent on proposed project leverages your time and their knowledge. Moreover, in housing market, proactive identification and exploitation of opportunities for buying property and finding profitable customers through innovative approaches is key activities of this project.
1.6 Research Structure
This research projects is structured into five distinct chapters that will address different parts of the project. Firstly, introduction gives a background to the issues of housing in the UK and presents a brief overview of the housing market while considering property investment business by defining the possible opportunity. Then, aims and objectives of this research identifies and further defines the relationship as to what makes the project entrepreneurship or innovation related. The second chapter presents a complete literature review related to the project, discussing key aspects of the UK property market with the factors that affects price of the house. The third chapter describes the methodology of data collection for the research project, which includes research philosophy, approach and method of data collection followed by data analysis. The fourth part presents the analysis of the findings from both primary and secondary data. Then, these findings are used as a market research and basis for the development of the business plan. The fifth chapter involves more detailed information about the business and its structure, which creates business plan for this practical project.
Finally, a conclusion will summarise the main points of the project and by reflecting of learning points, limitation of the research will be presented.

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CHAPTER 2
LITERATURE REVIEW

The housing market also known as the property or real estate market, which different stakeholders interact with business activities of buying, selling, renting the property and building mainly for investment purposes. The housing market is one of the most critical markets in which people as everyday consumers take part in, simply because housing is a requirement of every human being which is the largest consumption good that is purchased. In this literature review part, first researcher will study and analyze determinant of the house price. Secondly, current housing market of the UK from 2016 will be explored and how market has changed. Lastly, literature review will show affect of the Brexit vote into housing market and affect of demographics into housing prices and supply.
2.1 House Prices and Its Determinants
In order to understand the current house market prices in the UK, first have to find out which factors affects the housing prices or what are the determinants of the house prices in general. Looking at to previous research papers on the determinants of house prices, housing is very specific assets compare to other assets, because it can be used for two reasons, first for consumption and second as investment good (Davis and Zhu 2004). In the long term value of services provided by the property should be equal to the equilibrium prices of a household, for example resale value and future rent. In the short term the price of the houses can change fundamentally depending on the volatility on the housing market and among other things (Leung and Chen 2006). The vast majority of research papers distinguish the house market with three main types of factors, which are funding arrangements, geographic and institutional factors and macroeconomic drivers (Ibid). Following figure 2.1 below shows all the possible factors affecting housing market.

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Figure 2.1: Possible factors affecting housing market

(Swank et al. 2002)

2.1.1 Macroeconomic Drivers

The macroeconomics concerned with large-scale of economic of the country, such as interest rates and national productivity. Gerlach and Peng (2005), describes changes in the short run of the housing prices is affected by the fluctuations in the income, interest rate, change in price of land and the change in the housing quality. According to Hilbers (2001) the most important factor that affecting the UK house market is the disposable income. Moreover, the UK housing market is mostly influenced by number of housing supply, real mortgage rate and household income (Ibid). Most of the academic researchers mainly interested in the role of interest rates in housing market and the affect of the credit market on the economic cycle. According to Favilukis et al. (2010), the main reason for the dramatic increase in housing prices is the highly available credit and a lower payback strategy has increased the house prices and demand. In addition, other empirical studies have suggested that high mortgage approval rates, easy credit terms, and including lower payment rates caused large movements in the house market (Khandani et al. 2009). Calza et al. (2009) have found out that the affect of the monetary policy controls by the central bank on the housing prices and investments on housing is much greater in the nations with developed housing markets. Swank et al. (2002) examines how the changes in the mortgage interest rate and affects the housing market, as well as how the change in the taxation implemented by the government to lending institution affect the income of the mortgage industry. According to Swank et al. (2002) every new house buyer and mover faces different types of users cost, because each of them has different housing needs, different income and want different types of housing. There two segments of the housing market for the consumers that are first time buyers and home-movers. These two segments closely interlinked and determined by the current prices in the housing market. As the number of starter and movers increases dramatically the demand for the housing will increase, which means the price of the house will rise (Swank et al. 2002). As researcher mentioned at the start of this project that houses can be a financial investment for the consumers or investors. Therefore, if the return from the house investment taxed by the government it is likely will not be attractive to investors depending on the mortgage interest rates. Sterk (2010) examines the affect of macroeconomic decline on housing prices. Author’s idea is that the changes on the house prices have who effect on the labour market, because house is very important for geographical mobility. Sterk (2010) shows with evidence that the negative change in the house prices negatively affects the labours matching with the right jobs. Then author finds out that people who have jobs offers from different geographical location can only accept it if they are happy to relocate to different area.

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2.1.2 Housing Bubbles
When reviewing the literature, there are to many definitions of bubble, which
many of these definitions are standard. According to Stiglitz (1990), bubbles
is just type of speculation and this is not supported by any type of
fundamental changes, the only reason for higher prices of the assets
because investors believe that the price will be much more higher tomorrow.
Housing bubbles generally in the face of limited supply start with rise in
demand, which takes a relatively long period to replenish and increase (Ibid).
Therefore, investors enter the market, further rising up demand. Lind (2009)
states that usually dramatic increase in the asset prices followed by the
dramatic decrease. Identifying and forecasting the housing bubble is very
difficult to model, but researches have used number of alternative
approaches. Ayuso and Restoy (2006) practiced two alternative approaches
in order to forecast the housing bubbles. First, compare time varying discount
factors and observed price rent ratios. Time varying discount factors are
determined by the user cost of owning a house, which can be decomposed
into property tax, mortgage interest, maintenance costs, an additional risk
premium and tax deductibility of mortgage interest payments. The second
method differentiates the housing prices with the fundamental economic
values and academics find out that in the long run there is a relationship
between macroeconomics factors and housing prices (Ayuso and Restoy
2006).
Overall, there has been many number of research related to the
determinants of house prices in different countries. There is also enough
research done regarding to housing bubbles. However, little attentions has
been given to possible affects of Brexit on future housing prices in UK and
what determines the volatility of house prices. Therefore, researcher follows
exploring current housing market of the UK from 2016 and how market has
changed.

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2.2 The UK Housing Market
In the UK, the supply of housing includes privately owned and occupied
properties, privately rented and local authority rented housing and property
managed by housing association. According to Office for National Statistics
(ONS 2017,a), owner-occupied household is 65.7%, privately rented is
16.51%, housing association is 9.50% and local authority is 8.51% of
household. Housing crisis in the UK has been for many years, which house
prices are increasing and families cannot afford buying a house specifically
people living with monthly wage. Moreover, unaffordability of owning house
has increased private rented homes by 69% since financial crisis (Doward
2016). In addition, young families are renting houses and flats and wondering
if they will be able to afford a home on their own. Subsequently, nowadays
this issue has been easing mainly by the UK government, which they are
promoting the ‘Funding for Lending’ and ‘Help to buy’ schemes and so on.
According to Bank of England, the ‘Funding for Lending’ scheme is designed
to support by banks and building societies to lend more to households with
the extended period (Bankofengland.co.uk 2018). Moreover, the ‘Help to buy’
scheme helped first time buyers to own house with just a 5% deposit and
government lends up to 20% of the sale price and the rest financed by a
mortgage lenders on a repayment basis (Ferguson and Collinson 2016).
Government schemes to people with low income facilitated to buying houses
and demand on buying properties has increased significantly. Furthermore,
during the financial crisis between 2007-2010, house prices have decreased
by 16% and with the help of government schemes and the bank of mum and
dad has boosted greater demand on houses (BBC 2016).
However, with significant increasing demand on buying properties, the UK
government is stressed with shortage of housing supply since 2015.
Therefore, government has committed to fix broken housing market by
building and delivering a million homes by the end of 2020 and half million
more by 2022 (Gov.uk 2018,c). In addition, the government has produced
different range of tax relief schemes to get property developers building more
houses. According to Fraser (2017) UK celebrates exceeding yearly target,

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which 217,350 properties were completed in 2017 and this is an increase of
74% compared to 2012.
2.2.1 Uncertainty in the UK Economy
Brexit is the future withdrawal of United Kingdom (UK) from the European
Union (EU). The UK held a referendum on 23 June 2016 and 51.9% of the
participants vote to leave the EU. Thus, the UK government raised Article 50
of the Treaty on EU and expected to leave by 29 March 2019 (BBC 2018,b).
After the financial crisis, the EU referendum hit UK economy in 2016; pound
sterling dropped and there was increased in the inflation (Oecd.org 2018).
The outcome of the Brexit is unknown therefore until 2020 the UK economic
growth rate is uncertain. As it shown on figure 2.2 below, UK has highest
declining growth rate compare to other countries.
Figure 2.2: Economic growth rate of the UK

(Oecd.org 2018)
Before the Brexit referendum, everyone was expecting that British people
would vote against leaving the EU. Even all the third party surveys showing
that majority of people in the UK does not want to vote leave, therefore all the
investor was positive about the UK housing market and the prices was
increasing steadily (Ft.com 2018). However, after voting yes for leaving the
EU, UK economy hit by decline, which GDP dropped, productivity decreased,
price of EU import increased, consumer confidence dropped, sterling
currency rate decreased and so on (Oecd.org 2018). Therefore, the forecast

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on the quarterly UK GDP for 2017 decreased dramatically for the investment
banks, which is shown on figure 2.3.
Figure 2.3: GDP growth, quarter on quarter

(Ons.gov.uk 2018,a)
Due to the process of Brexit negotiations, there is no any academic studies
have been done yet regarding to UK housing market. However, there are
many news are publishing everyday about the affect of Brexit to housing
market. Looking at the table 2.4 below, in the year to May 2018 average
house prices in the UK have increased by 3.0%, which is down from 4.9% in
2017 (Ons.gov.uk 2018,b). Moreover, since mid-2016 the annual growth rate
has slowed and has remained under 5%. This is the reason that uncertainty
of Brexit negotiation stop people buying houses for short period of time.
Moreover, housing transactions has decreased past twelve consecutive
months of Brexit (Pwc.co.uk 2017). When it comes to house pricing, experts
say that the main impact of the vote has been in London, which previously
had been experiencing increase of house price record (Independent.co.uk
2018). As a result, in inner zone of London, house price are decreased as
much as 15%, which is the sharpest annual rate of decline since 2009 (The
Guardian 2018). Property investors are nervously awaits exit negotiations as
Article 50 is triggered. Nevertheless, it is essential to remember that other

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