Cheap UK homes tempt buyers

As the greenback continues its seemingly unstoppable rally, there's never been a better time to buy property in the UK with the British pound languishing at 50-year lows against the Hong Kong dollar, say analysts.

The British currency has fallen more than 25 percent against the greenback-pegged Hong Kong dollar from its highest point this year and was last trading at HK$8.77 per pound, offering Hong Kong investors the chance of saving more than 20 percent on property purchases in UK.

While some Hongkongers buy property in the UK primarily for investment, others buy homes for themselves, especially if they plan to immigrate or if they have children studying there.

Even though the UK's property market has begun to cool down amid rising mortgage rates, average property prices have risen nearly 8 percent in the first nine months of 2022 to 367,760 (HK$3.2 million), according Rightmove's UK property price index.

Wong Mei-han, regional sales director of Asia at Ballymore, expects prices to further rise by more than 15 percent over the next five years.

She says her property agency has received 40 percent more inquiries than usual, with buyers looking to take advantage of the weak pound and most investors choosing to buy in cash to avoid rising mortgage rates.

Also, buyers who previously wanted to invest in Canada, Australia or Singapore are now looking at Britain for purchases worth more than 2 million.

The UK property market has been depressed recently with interest rate hikes and high inflation hurting local buyers but Wong says that overseas interest in British properties continues to grow, citing how prices are 20 percent cheaper for Hongkongers based on the current exchange rate.

However, analysts also remind investors to keep a close eye on the pound as it could rebound due to the Bank of England's policies, while others warn that home values could crash.

CHECK THE YIELDS

When buying a property for rentals, investors must look at how much they can earn, analysts say.

The overall average rent in the UK was 1,159 (HK$10,048) per month in September, up 9.2 percent year-on-year, according to HomeLet Rental Index.

Andy Thompson, head of auction of northwest at SDL Property Auctions, says rental yields in big British cities range from 3.53 to 8.46 percent, with Edinburgh having the highest returns. Both Birmingham and Manchester take second place with a yield of 7.03 percent.

Erik, a veteran investor who currently owns six properties in the UK, says that with interest rate hikes and many homeowners struggling to repay their mortgages, there could be more sell-offs in the future and rentals are expected to be stronger next year.

Meanwhile, real estate broker and advisory firm Knight Frank says prices in London have dropped nearly 20 percent over the past year due to falling prices and the impact of the currency -- and the decline in prices and currency drops have together created an effective discount of 19 percent in London's sought-after Chelsea neighborhood and 17 percent in Knightsbridge.

Compared to 2014, when the pound was equivalent to HK$13.34 and property prices in London were 13 percent higher, the discounts are even greater at over 50 percent in Chelsea, Knightsbridge and Notting Hill.

A property listed at 5 million in Knightsbridge, for instance, would have cost HK$67.8 million eight years ago compared to around HK$31.2 million at current exchange rates.

Therefore, now is a good opportunity both investors and families looking at studios their children attending school in the UK, to take the plunge.

Recently, some major Hong Kong developers such as CK Asset (1113) have launched sales of their new projects in the UK and held exhibitions in the city to attract more buyers.

CK Asset released 260 flats at Powerhouse, Chelsea Waterfront on the River Thames in London, with prices starting from HK$14.79 million and areas spanning between 638 and 1,883 square feet.

UK developer Knight Dragon, which is owned by New World Development (0017) chairman Henry Cheng Kar-shun, also launched sales of 151 flats at Peninsula Gardens in London with starting prices of HK$3.13 million.

MORTGAGE PLANS

Property investment platforms like Red Brick Property and Roots offer advice and information for Hongkongers who want mortgages for a property in the UK.

There are two types of mortgages - residential and buy-to-let - with different requirements, which are settled in pounds and can be applied for at banks in the UK.

Prospective buyers need to meet a certain income threshold to apply. For example, HSBC (0005)requires an annual salary of 75,000 (HK$652,500) for a residential mortgage and a 50,000 annual salary for a buy-to-let mortgage.

Besides, there will be an interest rate stress test requirement of 200 basis points for borrowers just like in Hong Kong, and the debt servicing ratio or DSR cannot surpass 50 percent after adding the 200 basis points.

The DSR refers to the portion of a borrower's gross monthly income that goes towards repaying the monthly loan.

The loan-to-value ratio is higher in the UK than in Hong Kong. HSBC indicates that the ratio can be up to 75 percent while the Bank of China (3988) offers mortgage of up to 80 percent for residential purposes and 75 percent at most for rentals.

Buyers can get a maximum 30-year mortgage term at the Bank of China compared to 25 years at HSBC.

Other expenses will include the application fee, arrangement fee and valuation fee, which run into thousands of pounds. Besides, buyers need to hire a solicitor to provide assistance with the legal elements of the investment, including due diligence and researching any legal issues concerning the property.

RATES ON THE RISE

For borrowers, the bad news is that mortgage rates have been soaring in the UK. The average five-year fixed-rate mortgage rose above the 6 percent threshold for the first time in 12 years in early October and up from 2.25 percent a year ago, according to research group Moneyfacts. The average two-year fixed loan also hit that level earlier.

The monthly repayment on an average-priced home in the UK, assuming a 25 percent deposit, would have been around 725 at the start of 2021, when the average price was around 230,000, according to Bloomberg economist Niraj Shah.

But at current rates, it will be more than 1,300 on a 275,000 average price.

Therefore, buying a UK property in cash is a much wiser choice than applying for a mortgage.

EXAMINE THE RISKS

Investors should also be aware that the pound could rebound due to the Bank of England's intervention.

Last month, the pound hit a record low of 1.03 against the US dollar after the former Chancellor of the Exchequer Kwasi Kwarteng's unveiled a new set of economic policies, which were dubbed the UK's mini budget and included the biggest tax cuts in 50 years. The plan led to massive market volatility, tanked the currency and increased mortgage rates.

It forced the BOE to intervene in the bonds market to stave off a collapse in part of the pensions industry, and the intervention helped the currency rebound by 1 percent.

Last Friday, however, the pound fell 1.2 percent after Kwarteng was sacked, ending the week at US$1.1207.

Meanwhile, rising mortgage rates could mount more pressure on borrowers and analysts are bracing for a plunge in home prices in the near future.

"It's crunch time for the UK housing sector, with rocketing mortgage rates set to tip the market over the edge," says Shah, who expects prices to fall by about 10 percent next year.

Analysts at Goldman Sachs meanwhile warn that UK property values could fall by 20 percent amid a steep rise in borrowing costs for landlords.

One Global, however, says that foreign buyer interest in London property has remained unchanged despite an increase in interest rates.