Contact Us
News

These Four Property Sectors Could Be Hit By A Dramatic Reduction In Immigration

The U.K. goes to the polls today for a snap General Election in which immigration is at the heart of the debate about the country’s future.

If opinion polls are to be believed, the U.K. will wake up tomorrow with Theresa May continuing in power, and the Conservative party will start the work necessary to fulfill a manifesto pledge to bring net immigration to the U.K. below 100,000 for the first time since 1997. Last year the figure was 273,000, according to the Office for National Statistics.

Such a dramatic reduction would be hard to achieve. And even trying will cause a major disruption to some sectors of the economy and real estate.

Student Housing

Placeholder

Of the 596,000 people that migrated to the U.K. in 2016, 134,000 were students, ONS figures show. May has indicated that students will not be discounted from the net immigration figures, so numbers will need to drop dramatically to hit the target of fewer than 100,000 net migrants.

The Higher Education Policy Institute predicted that just a reduction in EU student numbers could cost the U.K. £2B a year in lost tuition fees and other expenditure.

And much of the growth of the student housing sector, especially in London, has been driven by increasing numbers of wealthy overseas students able to pay higher rents than domestic scholars. A recent report from London First and PwC showed 20% of London students were from overseas, 67,000 out of 366,605.

Overseas students have typically preferred to live in the kind of purpose-built student accommodation that has in the past five years become a mainstream asset class with a value of £43B, according to Knight Frank.

According to a March report by KPMG on the effects of reduced immigration and higher tuition fees from EU students: “The risk for real estate businesses is therefore a dramatic reverse of the trend [of growing rents and values]. In recent years, the rising number of  E.U. students have been proportionately more attracted to purpose-built student accommodation. Post-Brexit – and even before changes to migration and fee rules – their numbers, and therefore the need for  accommodation, are bound to decline.” 

The report argues that Coventry, Canterbury, Southampton, Bath, Exeter and Manchester are most at risk because of higher than average numbers of foreign students.

Hotels, Restaurants, Leisure

Placeholder

The hospitality sector relies heavily on immigrant labour. Three-quarters of waiting staff in the U.K., 37% of house-keeping staff and one-quarter of all chefs are from the EU, according to a report earlier this year by KPMG commissioned by the British Hospitality Association. 

KPMG said it could take 10 years to reduce the need for EU workers alone. It argues that with the U.K. at close to full employment, there are no easy-to-access pools of labour to replace immigrant staff. 

The effect on the property in these sectors is indirect — if operational performance is impacted, this inevitably feeds through to asset values, especially for property with shorter leases or management contracts rather than leases.

Healthcare and Senior Living

Placeholder

Healthcare and senior living have not yet truly taken off in the U.K. and Europe, and curbs on immigration are unlikely to change that.

“It is not a mature sector here yet,” Ivanhoé Cambridge Chief Finance Officer Nathalie Palladitcheff told a ULI conference in Paris earlier this year. “In the U.S. it is easier because you just have one regulatory system, and all the provision is private, so there is huge demand. In Europe, you have different regulations in different countries, and the public and private side are closely linked, so it is very hard for us to know the rules of the game and understand the operational risk.”

That risk is increased dramatically if it loses immigrant labour.

The social care sector, which includes healthcare and elderly care, employs around 1.3 million people in the U.K., according to official figures, and around 7%, or 91,000, are from the EU alone. The number of people employed in the sector will need to rise to meet the ageing U.K. population.

As with the hospitality sector, staff shortages could cause a slowdown in operating profits, which is likely to deter those institutional investors already wary of the operating side of the business.

London Development

Placeholder
Royal Wharf

In March, London Mayor Sadiq Khan outlined the issue a curb on immigration would create for the construction industry in London.

More than half of London’s construction workforce of 300,000 is from overseas, and 20% of the U.K. construction workforce will retire in the next five years.

“There is no way training new U.K. workers will be enough to fill the gap,” Khan said.

Developers are already being hit by rising construction costs. The International Construction Market Survey of costs conducted by Turner & Townsend estimates that London construction costs could rise by 5% in 2017, and this would be further exacerbated by inflation caused by the decline in the value of the pound and further labour shortages.

The developer of Battersea Power Station said earlier this year that rising costs and falling prices of homes sold meant it was likely to achieve a return on the scheme of around 8%, compared to its 2013 estimate of 20%.

Further reading: Brexit's Impact Beyond The UK; U.K. Property's Biggest Names Are Bankrolling The 2017 General Election