Following the gradual decline in the value of the pound throughout 2022, the result of a cost of living crisis and political uncertainty, the British pound has reached lows not seen since the 1980s. However, as the age-old saying goes “with uncertainty comes opportunity”, and the current turmoil in the British government, and resulting impact on the economy, represents an investment opportunity for international investors. The weak status of the British economy has generated a unique opening for overseas investors to reap the benefits of the British property market. The property market in the UK has long been an advantageous choice for overseas investors, thanks to its steady growth and stability. With the pound at the lowest level for decades, investors can now obtain much greater returns on their investment. However, the uncertainty will not last forever, and as the economy is expected to recover in 2023 investors should look to strike while the iron is hot, and capitalise on this unique opportunity in the market.
Why is the British Pound so Strong Today?
Despite the recent decline, the British pound remains a strong worldwide currency, especially relative to the size of the country, for a range of reasons. The origin of the pound’s strength can be understood by considering the history of the UK. Before World War 1, Britain had experienced an economic boom thanks to the industrial revolution. Combined with an empire stretching across the globe, this provided Britain with one of the strongest economies in the world. Britain was responsible for 40% of the world’s overseas investment, so naturally, the pound was the primary currency for international trade. This earned London status as the financial capital of the world, and made the pound was one of the strongest currencies. However, the impact of the two World Wars on Britain, as well as the rise to power of the United States’ economy throughout the twentieth century, caused the pound to fall steadily relative to the dollar. Despite this, the British economy has remained strong to this day, thanks in part due to the reactivity and willingness to act by the Bank of England. However, as explained below, the social and political factors of recent times can shift the balance of the pound relative to the dollar, which can open up opportunities for investments.
Current Status of the Pound?
- How much is $1 worth to a pound?
Comparing currency to the United States’ dollar is a useful metric of strength. Again, this is historic in its origin, due to the strength of the dollar compared to the rest of the world at the end of World War 2. Today, $1.00 USD is equal to £0.84 GBP (17/02/22, source: Morningstar). Inversely, £1.00 GBP is equal to approximately $1.20 USD. In addition, at the same time, £1.00 GBP is equal to €1.12 Euro, and €1.00 Euro is £0.89 GBP.
- How is the UK pound doing?
Over the last few months, the value of the UK pound has fallen to especially low levels. Compared to the United States’ dollar, the current performance of the pound is the weakest since the mid-1980s. The value has been dropping following the highs of 2007 to 2008, where the pound peaked at equal to approximately two USD. The pound-dollar exchange rate has seen sharp drops at key dates, linked to social and political events, holding fairly steady in between, to reach the weak exchange rate seen today.
- Why is the pound losing value?
Events across the UK and beyond have caused the pound to lose value recently. However, the pound has been performing poorly since the result of the country’s decision to leave the European Union in 2016. Brexit caused the pound to fall from a steady $1.6 USD to below $1.3 USD. In 2022 the pound’s value decreased steadily, and there are several factors which caused the pound to become weaker throughout the year. The cost of living crisis, sparked by the rise in energy bills following the Russian invasion of Ukraine, has negatively affected the economy. The death of the British Monarch, Queen Elizabeth II, also weakened the pound. Lastly, the country’s government has been undergoing a period of instability. The country underwent a tumultuous end to the year, following the short tenures of Liz Truss and Chancellor Kwasi Kwarteng. The combined impact of these events has resulted in the pound reaching long term lows relative to the dollar, trading as low as $1.07 in September. While the value has since stabilised, the pound remains weak, offering advantages to international investors in the UK.
What does this mean for International Investors?
The current low value of the pound has produced a unique offering for international investors in the UK. The falling pound means overseas currencies are more valuable in Britain, and investors can currently receive greater value for their money. This is particularly enticing for investors from countries whose economies are performing well, allowing investments
in UK property at an attractive price. The British property market is a particularly appealing investment market for overseas investors. Housing in the UK is a famously stable investment, and is undergoing steady growth. Within the country, there are additional hotspots for investment, demonstrating ahead of the curve levels of development. Northern cities, such as Manchester, Liverpool and Sheffield are experiencing a surge in desirability that is drawing new residents to the area. With average property prices below the county’s average, but a rise in economic output, these cities offer great prospective rental yields and returns on buy-to-let investments. Birmingham, in the West Midlands, is another case for investment, where an increase in young professionals exploiting the overflow of London’s business to the city, is leading to huge demands for housing and a growing property market. The recent uncertain times in the UK, which have led to the record low value of the pound and new investment opportunities, will not last forever. The pound is expected to rise throughout 2023, making now the ideal time for overseas investors to exploit their currency’s strength and maximise their investments in the UK property market.