Property

Brexit: A Whole New World



The unexpected Brexit victory poses questions for UK property investors beyond simply capital appreciation and yields.

The world was a very different place on the morning of June 24. The day after the UK – mostly England and Wales – voted to divorce itself from its 40-year relationship with the European Union, the power of political instability was immediately felt.

The pound dropped nearly 10%, stocks tumbled, and there was instantly chatter of a wholesale reimagining of the continent.

The French right wing was making noises about leaving (then came “Portugo”, “Outaly” and “Finish” witticisms); Spain wanted Gibraltar back; Scotland was talking about a second independence referendum in order to stay in the EU (barring a legislative block); and Northern Ireland was flirting with reunifying with the Republic for the same reason.

Separation Anxiety

Whatever happens in the future, the present is defined by uncertainty. At press time, Prime Minister David Cameron resigned, as had Leave-supporting UKIP leader Nigel Farage. Former Tory frontrunner Boris Johnson had dropped out of the race to allow new party leader and PM Theresa May in the hot seat.

A formal exit could take up to two years — even though the EU is pushing for a speedy conclusion. One thing is certain: the UK is facing an identity crisis as reported instances of intolerance and xenophobia skyrocketed after the vote.

The immediate fallout of the Brexit vote was noticed in stock markets and currencies, but theories about the long-term effects – healthcare, taxes, trade and movement among others – are theoretical at the moment.
The enormous European market (US$16 trillion) for British goods is clearly something the UK would like to retain access to, but FIREBS must consider location too.

According to The Guardian, the European Banking Authority is already preparing to move to either Paris or Frankfurt.

IMF boss Christine Lagarde said despite underestimating Brexit, the central banks have the markets under control, though trade credit insurer Euler Hermes predicts upwards of 1,700 business insolvencies and negative real GDP growth between 2017 and 2019 (4.3%) if the UK exited without a trade agreement in place. But what of the property market?

Real estate investors, both individual and institutional, are currently in a holding pattern, but a weaker pound can make investment now the smart move in the long run.

In the way it was open season in the US when the recession hit, the UK could benefit.

Despite recovering somewhat, “The British pound is currently at a 31-year low, which itself provides an attractive rationale for foreign investors with an appetite to do so to acquire properties in the UK”, said Anuj Puri, chair and country head of JLL India in a statement.

“There is no doubt that the UK – particularly cities like London – has always held a special attraction for Indians, particularly HNIs, with business interests or families there.”

Nicholas Holt, Knight Frank’s head of research for Asia Pacific, agrees, noting the sterling’s drop will impact repatriation of rental income and capital gains in the short-term, but argues: “The decision, however, could also present a buying opportunity, as the significant drop in the value of the pound, as in 2009, could lead to an uptick of interest by Asian investors, who, over the last few months have adopted a wait-and-see approach to the referendum – and will now see their buying power increase significantly.”

London-focused investors, in particular, will be watching the market.

After the initial shock to the system, JLL in London predicts a possible surge as opportunities return to the UK’s core markets and the benefits of a weaker sterling are acknowledged.

Still, “The London housing market will feel the effects of the vote leave decision more deeply”, said JLL’s head of residential research, Adam Challis.

“The interconnected trading relationship between London and the rest of Europe means the implications are more complex. This will exacerbate the uncertainty for London’s homeowners.”

Silver Linings

However Liam Bailey, head of residential research at Knight Frank in London, is quick to point out London has been performing only moderately since mid-2014, when a rash of new regulations, taxes and a then-looming referendum bred caution.

“Until we get a little more clarity on where the UK ends up, EEA [European Economic Area] seems the most likely outcome at the moment, activity will be subdued,” he says.

“That said, deals are happening, and in Asia in particular, investors in the commercial and residential markets are looking to take advantage of the weak pound.

“We’ve seen instability over the past 18 months due to tax changes and the election last year, and we have witnessed its impact on the market.

“Sales volumes are lower than they were in 2014, and prices have effectively stopped rising. The momentum is there – employment growth, the new HQs in London, generally tech rather than financial. There are a lot of jobs and a huge amount of good news, but it’s hidden at the moment behind the EU debate. But there will be a resolution; London is a resilient city.”

The fundamentals are strong: over 750,000 new jobs created in the past few years versus only 140,000 new homes supplied, and robust commercial leasing coming from the creative industries, which are removed from passport services the way FIREBS are not.

Investors, though, may worry about losing desirable banking tenants. Rental supply is likely to rise while demand stays the same, creating a new dynamic.

“The question on everyone’s mind is how [Brexit] will impact values,” says Tim Hyatt, Knight Frank’s head of lettings.

“The reality is, it’s too soon for firm forecasts. On letting we can say there is a way of not only protecting your return, but of maximising it. It will become a more competitive market.”

Finally, the UK’s fate could have an impact on the wider world, including on investment in Asia Pacific.
Colliers International in Hong Kong suggested the Brexit vote could keep real interest rates from rising soon, to the entire region’s benefit.

The Brexit decision is likely to result in continuing downward pressure on bond yields, making the 3% to 6% yields on core APAC investments attractive. Above all, the referendum was a stark reminder political shocks are not the purview of emerging economies alone.

Referring to Colliers’ spring capital market research, Andrew Haskins, executive director of research for Asia, argued that capital outflows and stagnating inflows reflect caution regarding the Chinese economy, overconfidence in Japanese reforms and risk in regional emerging economies – not Asian property.

“In our view, the shock of the UK’s vote should serve as a salutary reminder to international investors of the potential for negative political and economic surprises in developed western as well as emerging economies.”

>> Related Article: London Still Standing After Brexit