How will the fall in oil prices affect the UK real estate market?

By: Rachel McCormack
Rachel McCormack
Rachel loves food, drinks, broadcasting and financial markets. She enjoys a fine wiskey and some stock market research. read more.
on Feb 9, 2015

UK house purchases are expected to receive a boost as the recent decline in oil prices increases spending power. The drop in oil prices has already resulted in a sharp downward push in the UK inflation rate, which could boost the appeal of real estate assets due to their good cashflow potential.

There are, however, concerns over the prospect of investors, whose wealth derives from oil-based revenue, curtailing spending in the UK. Furthermore, there are increasing concerns as to how the UK’s own oil sector will manage, not to mention cities and regions that are reliant on the industry, such as Aberdeen for example.
A large number of foreign investors who have purchased real estate in the UK over the past few years have originated from oil-rich countries, with Middle Eastern buyers in particular dominating the commercial and residential investment markets as London’s status as a safe financial haven continues to lure money from all corners of the world.

According to a report from Starwood European Real Estate Finance: “Lower oil prices will boost GDP growth and create more consumption, which should boost retail spending and hence strength of and opportunity in the retail real estate sector. “
However, the investment group also warns over one of the potential outcomes of the slump in oil prices: “Oil-rich sovereign wealth funds are often large-scale buyers of real estate using surplus funds generated from oil revenues […] Without such large surpluses (Saudi is running a deficit at the moment) their capacity for further acquisition may be tempered over the short-to -medium term.”
There are additional signs that the wave of inward investment may be about to recede. Last month, Standard & Poor’s cut its economic growth forecast for Malaysia, a country which is an active investor in UK real estate, to 4.6 percent for this year and 5.0 percent for 2016 due to the decline in oil prices.

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