Taking Stock Of Brexit

6 September 2016

As the post-Referendum hype starts to settle, Senior Investment Manager, Hamish Pound looks at the current opportunities for UK property investors

If the result was unexpected, then the same certainly applies to what has happened after the vote. Had many of the naysayers been correct, then currently, the UK would be in the midst of a post-apocalyptic investment landscape: stocks in freefall, the markets in chaos and foreign property investors heading to the hills. The reality looks very different; remarkable only in just how measured the reaction has been.

Profound shock or change management? 

Chancellor George Osborne may have warned of a “profound economic shock” if the nation voted the wrong way. Yet if one looks at the steady trickle of data over the last two months, coupled with what has been happening on the ground (especially on the property front), it’s difficult to find evidence of a profoundly damaged economy.

There’s a better case for saying that what we’ve just witnessed is a change - or what Mark Carney described as a “regime change”. And what we are currently witnessing is a natural reaction to that change: increased volatility in the immediate aftermath and expressions of caution - yet still amid a climate of ‘business as usual’.

As the Bank of England Governor also put it, “The UK can handle change”. As Britain gets on with change management, the fundamentals remain intact, presenting property investors with opportunities in the short, medium and long-term.

The short-term: foreign investors cash in on the currency play

Three weeks after the referendum, I raised the point that a USD-pegged investor buying a GBP350,000 property on 11 July would have saved over USD71,000 than if they had made the same purchase just before the vote results were announced.

Since the vote, GBP/USD has continued to trade at and around the 1.30 mark. In fact, for investors seeking UK mortgages, the news got even better earlier this month, following the interest base rate reduction to 0.25%.

The ‘bonus’ remains in place therefore, and the evidence suggests that foreign investors are taking advantage of it. Last month, Juwai, China’s biggest international property portal, reported that buyer enquiries into UK property were up by 40%. With the new British prime minister safely installed, a Juwai spokesman summed up the attitude of Beijing’s army of investors: “the UK looks like the same old safe haven as ever - but cheaper.”

While the ‘safe haven’ element is likely to remain a permanent fixture, FX markets are of course much less predictable. To realise the full potential of this exchange rate benefit, now is the time to act.

Why property investors should look at the FTSE 250… 

Market watchers will be familiar with what happened to the FTSE 100 in the aftermath of the vote: a record-breaking downward spike followed by recovery and a record high a week later. 

But while this was happening, analysts were careful to draw attention to the FTSE 250, raising the point that the focus of this index on domestic companies rather than just multinationals makes it a more reliable barometer of the state of UK business than the FTSE 100.

Those analysts raised a very valid point - and for property investors, this index is worthy of particular attention; it’s an indicator of the health of major companies that are heavily active in the UK - and by extension that tend to have a heavy commercial property footprint here - rather than those that are merely headquartered in the UK.

The bounce back of the FTSE 250 has been slow and steady rather than meteoric: yet somewhat below the radar, 24 August saw the index close above the 18,000 mark for the first time in more than a year. We’d agree that those companies are the mainstays of the UK economy and welcome the fact that the markets regard them to be in fundamentally good shape.

UK business: caution and “business as usual” 

When businesses have expressed a view, it tends to be one of caution; as firms get to grips with a changed landscape, there’s evidence to suggest that some firms are putting hiring decisions on hold, for instance. Yet in the run-up to the vote when uncertainty was prevalent, the UK jobless total continued to fall; at 4.9%, the unemployment rate is currently at the lowest since July 2005.

The medium term property outlook: confidence and steady growth 

July’s RICS UK Market Residential Survey suggested that the net balance of those homeowners expecting prices to increase over the coming year increased from zero to 23%. For the London market, the same survey points to an expectation of 4% growth per annum over the next five years.

On the property front, the mood appears to be one of quiet, tempered confidence. And neither is there any strong evidence of an exodus of companies and a consequent major driving down in demand. In terms of concrete announcements, the opposite has been true, with GlaxoSmithKline, US banking giant Wells Fargo and McDonald's all announcing property expansions.

The long term 

Major construction companies such as Persimmon and Taylor Wimpey experienced significant share price drops in the aftermath of the vote. These have been slow to recover (with Persimmon still trading significantly below its pre-vote price, for instance). It may well be the case that major projects are on hold until the political settlement becomes clearer. The structural supply/demand imbalance in the UK property market provides is one of the main drivers of growth in the sector so the knock on effect of fewer new projects could result in a widening of this imbalance.

Our view? 

Short term, this is the time to take advantage of the currency play. It’s a case of acting now to tap into the medium and long term potential of the UK market. It’s significant that recently the new UK Prime Minister Theresa May has spoken of the need for all areas of the UK to tap into the growth opportunities that policymakers will be looking to forge as the country enters into new trade arrangements. Our strategy remains outer London and the key regional growth cities of Manchester, Liverpool and Birmingham.


 

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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