New PM Brings Certainty To Markets

9 August 2016

Three weeks on from the UK’s historic vote to leave the EU, Hamish Pound, Senior Investment Manager, surveys the scene and considers the implications for foreign property investors.

As a UK investment specialist, the days following the EU referendum were certainly disconcerting; with the pound dropping to 1985 levels, shares in British companies plummeting in value and the FTSE falling 5.7% over three days.

As expected however, we have started to see calm return, with the FTSE recovering to surge past its post-Brexit low, and even edge into bull market territory. Markets across Europe rebounded in particular with the news on Monday that Theresa May was set to be confirmed as Prime Minister – bringing the summer Conservative party leadership contest to an end and clearing the path ahead.

May has previously indicated she will not trigger Article 50 until the end of the year, a decision which will further enable the UK to carefully prepare for this transitionary period of trade negotiations. Her depth of experience was clearly good news for investor sentiment; a member of parliament since 1997, May has served in David Cameron’s cabinet since 2010 and is the UK’s longest-serving Home Secretary for sixty years.

The journey ahead is a long one and it will likely take at least two years for the UK to renegotiate its status in the EU however, in the uncertainty there is and will continue to be opportunity.

Resilient economy

Firstly, news of the UK’s economic downfall has been much exaggerated in our view. The UK economy has grown faster than almost all other European economies over the past nine years, and it’s financial system – stress-tested over last 10 years – is stronger and more resilient than it has ever been. The Bank of England is well-prepared to respond effectively and quickly to play its part to secure the UK’s financial system.

Currency play and mortgage access

In London, Knight Frank reported a prime real estate sales spike of 40% in the week after the referendum compared to the previous week, which it attributed to the currency movement.

As the pound remains weak in the short to medium term, there are certainly advantages for USD-pegged investors in Hong Kong and the Middle East and other currencies such as the Singapore dollar. For example, those who purchased a GBP350,000 property on 11 July would have saved USD71,422 (HKD554,145 / AED262,329 approx) than if they had made the same purchase on 23 June.

Interest rates are also set to remain low, with the Bank of England considering a cut in the near future, and no increases expected until at least 2020. For foreign investors seeking UK mortgages, an imminent base rate reduction to 0.25% would be very good news.

In the longer-term, foreign investors could even benefit from a wider array of mortgage finance products as the UK mortgage market would potentially no longer be regulated by the EU. Find out more about the impact of Brexit on mortgage finance in the UK, in our latest blog.

Housing shortfall

The UK’s residential property market remains driven domestically, with housing supply struggling to meet demand – an imbalance that is likely to continue widening. It’s safe to say that demand for property in key locations will only continue soaring.

Prime opportunity?

The only market expected to dip is prime central London. In Outer London and growing regional cities where supply is low we don’t envisage any down valuation.

Manchester in particular is evolving into a truly global city, with major foreign investment pouring in from beyond the EU, direct air routes into China and the Middle East, and thriving commercial and higher education sectors. The Northern Powerhouse project is key to rebalancing the UK economy and we expect the government to redouble its efforts to drive the scheme’s success even more as a result of the ‘leave’ vote. Non-EU related investments such as Highspeed 3 and Transnorth, Cross Rail and High Speed 2 also look set to continue, cementing nearby property market hotspots.

Construction chokehold continues

In addition to continued growing demand, supply may suffer as a result of the ‘leave’ vote. In the construction industry there is a dependence on the EU when it comes to manufacturing and labour, with 12% of the construction workforce in the UK coming from the EU. With mobility of the workforce still to be negotiated and a likely increase in the cost of building materials, this rise in the cost of construction will put pressure on house prices, while supply may also be constrained by political uncertainty.

Five year hold

Over the last 20 years, London property has offered consistent, steady profit when held over a five year period (our minimum recommended holding period), even during the global financial crisis. Furthermore, IP Global clients who invested with us in London between 2009 and 2013 made a combined GBP116 million in capital appreciation by April 2016 – find out more about our recent London Portfolio Analysis here.

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Compare this performance other asset classes, and other global property markets, and you’d struggle to see a similar pattern.

Our focus continues to be on Outer London pockets of value and regional growth cities where global flows of inward investment and commercial activity means the EU is not a main player. While there may be volatility in the property market in the short-term, property continues to be a long-term, stable asset class, and the benefits of a weak pound in the short term should outweigh the benefits of waiting for more stability and certainty.

Our view? There is no time like the present to take advantage of property in a market that remains resilient as it navigates the establishment of its new relationship with the EU.


 

Hamish Pound

Written by Hamish Pound

Hamish is Head of Investment at IP Global and specialises in both developed and developing real estate markets following positions in the UK, New York and Thailand. As a consultant and analyst in his previous roles he has consulted on a number of new development projects across Southeast Asia.

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