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The implications of Brexit for investors

The implications of Brexit for investors

September 2016

While Britain still weighs up the implications of Brexit, Cityscape takes a look at the opportunities this opens up for international investors looking for a slice of the action in the key real estate markets of London, Birmingham, Manchester and beyond.

 

The UK voted out of the European Union on June 23, 2016, following a public referendum that saw months of fierce campaigning by both the Leave and Remain camps.

The shock result had an immediate impact on the markets. The pound sterling dropped to its lowest level against the U.S. dollar in more than 30 years, while billions were written off the stock market as it crashed on June 24.

While the knee-jerk reaction was shocking, the country now finds itself in limbo – with up to two years of ‘European divorce proceedings’ ahead of it.

However, in a country where housing demand outweighs supply, what will Brexit mean for the property market? Opinions are mixed. Some experts claim ‘fortune favours the brave’ and now is the time to invest, while others are urging caution and a ‘wait and see’ approach.

Price drops and currency wins

With the market in a period of uncertainty, some softening is expected in the prices of property for sale – good news for overseas investors.

The devaluing of the pound against the dollar makes property in the UK an even more attractive proposition for those buying in dollars or currencies index-linked to the dollar, such as many Middle Eastern currencies.

“The 12% drop in the value of the pound against the dollar since the referendum result offsets our expectation of a 5% fall in prices in the short term. That said, nobody can make predictions with any certainty at present, so one has to err on the side of caution when offering opinion,” pointed out Louisa Brodie, Head of Search and Acquisitions at Banda Property.

“With currency discounts of tens of thousands of pounds, American, Middle Eastern and Far Eastern investors have all made enquiries [since the vote] and they aren’t overly concerned with the prospect of short-term price dips since their goals are long term,” she added.

Martin Bikhit, Managing Director of Kay & Co, said: “We have seen a rise in the number of Middle Eastern and Indian buyers since the referendum; we have secured the sales of three prime apartments valued between GBP 5 million and GBP 15 million since the value of sterling fell.”

Steve Povall, Managing Director of Residential Estates, said the drop in currency makes now the perfect time to enter the market as an investor.

“As a foreign investor, now is an excellent opportunity to purchase UK property, particularly at the cheaper end of the market. Student property remains a strong investment as student numbers increase from both the UK and abroad at the country’s most prestigious universities,” he said.

Existing stock & current owners

The UK market seems well positioned for those looking to make an entry, but what about those already holding a property or portfolio of properties in Britain? Is now the time to get out, or should you hold steady and ride the possible storm?

Stuart Johnson, Business Development Manager at Prime Centrum, said that if you were not planning to sell before the EU Referendum result then there is no reason to sell now. “Providing the property is located where good tenant demand exists, which is the case for many UK cities, there is no need for concern. Indeed, rental demand is increasing in many cities and during the current uncertainty less locals are looking to buy new homes for the first time, hence increasing demand,” he said.

Ray Withers, CEO of Property Frontiers, agreed now isn’t the time to sell. “Investors who already hold a UK property portfolio should hold tight and wait for the exchange rate to improve. For those who hold mortgages, the likelihood of falling interest rates is good news,” he said.

Meanwhile, Marc von Grundherr, Lettings Director at Benham & Reeves Residential Lettings, has found that existing owners are actively looking to expand their portfolios, following the Brexit vote.

“Lots of our overseas clients have been in contact as they are now actively looking to add to portfolios. Even clients who had said London was too expensive are now re-examining the situation due to the sterling drop versus the Dirham. Further clients who had said they did not want to let as they were considering selling are changing their minds and putting the properties back up for rent. We’ve also seen a very positive response in the rental sector. Not only is demand up, but tenants are keen to sign two or three year leases, something that was relatively uncommon until recently,” he explained.

New cities & new development

Looking to enter the UK market but not sure where to place your investment? The recent Brexit vote has cast a shadow over some of the most recent landmark developments in the capital city of London.

Nine Elms – a 195-hectare redevelopment on the south side of the River Thames – was a beacon of new London. Now, the large-scale mixed-use development may prove too big for the city’s market to absorb.

“The biggest effect [of Brexit] is to likely be on new developments in London, in particular areas like Nine Elms, where there is a massive oversupply of high value flats, which there simply aren’t the end-users for at the moment. There is likely to be some drop in prices, although how much remains to be seen,” commented Edward Heaton, Founder & Managing Director of property buying and search agent Heaton & Partners.

Camilla Dell, Managing Director of Black Brick, remarked: “Areas such as Nine Elms in Vauxhall and Earls Court in West London are particularly vulnerable due to oversupply of expensive properties aimed at the overseas investor. However, there are a handful of stand-out developments – such as Television Centre – that we believe are likely to continue to prove popular, and there will certainly be bargains to be had, particularly on the secondary market.”

With London’s most noteworthy developments tipped to struggle, where are the experts recommending investors place their money? Second tier cities such as Birmingham, Manchester and Liverpool have been showing great returns at a lower investment mark than London for a number of years now.

“Our advice is to focus on areas outside of London such as Manchester and Liverpool that will continue to take advantage of strong population growth and infrastructure spending. The government has committed to maintaining current infrastructure projects and with lower entry prices and higher yields these cities offer a strong investment case,” said Paul Mahoney, Managing Director, Nova Financial.

According to Property Frontiers’ CEO, Ray Whithers, there has been a surge of interest towards the mainstream property market, with second tier cities and the London suburbs set to benefit more than central London. “It may be that buyers are anticipating a correction in the market when it comes to prime London areas and thus are focusing on outer London and cities such as Birmingham and Liverpool instead,” he explained.

Future investment & long-term goals

It’s hard to predict what the future may hold for the UK’s property market. One thing is for sure – there is a long period of uncertainty ahead, while the country re-establishes its relationship with Europe and with its other global trading partners.

However, its appeal with Middle Eastern investors is unlikely to diminish, with London remaining a draw card for any would-be property investor.

“London continues to be one of a handful of truly global cities with a diverse culture, rich history, a transparent legal system and leading education facilities,” commented Banda Property’s Brodie.

Banda Property forecasts a fall of up to 5% in London house prices this year, in part due to the over ambitious asking prices of the last 18 months. However, the London housing market is resilient and a lack of supply will underpin values into early 2017, when the market will return to steady positive growth.

“The underlying strengths of the UK economy remain in place and there continues to be a demand/supply imbalance that will underpin prices. Demand for prime London property rests on a wide range of drivers, most of which are unaffected by the referendum decision. Furthermore, in a weakening global economy, London’s property market will still be seen as a safe long-term investment,” Brodie explained.

Jean Liggett, Founder & Managing Director of Properties of the World, offers an alternative to the traditional buy to let investment, with the firm seeing an increase in enquiries for commercial properties after the referendum.

“In an uncertain market, investors like the fact that hotels, student accommodation and care homes offer fixed returns of five or more years and the return is more than twice what they would get from most residential buy to lets.

“Buyers know, for example, that they will get a circa 8% return year in and year out with a care home, student accommodation or hotel room compared to residential buy-to-let where the returns are not fixed and hence could fluctuate greatly year on year.”

Meanwhile, Black Brick’s Dell believes the Super Prime market will be the least negatively affected, with the collapse of the sterling meaning that dollar buyers are actually factoring in a 12.5% increase in their purchasing power since before the poll.

“For the global elite buying properties at GBP 20 million or above, purchases tend to be about lifestyle choices, rather than business decisions, or are to diversify extremely large portfolios. Indeed, we are still seeing transactions continue; Brexit did not feature in conversations with clients in this part of the market before the referendum, and it is unlikely to be much of a factor now it is underway,” she remarked.

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