Brexit – The Property Debate – Have Your Say

01.10.16

As David Cameron formalises renegotiated EU membership terms, Laura Henderson, Managing Editor of Abode2 Luxury Property Magazine assesses the likely impact on foreign investment in UK property

As we surf the interim panic waves as Britain resettles its terms of EU membership before a vote here in June, there’s little doubt that any referendum result on our country’s relationship with its most influential trading partner will create financial losers as well as winners. But what lies in store for the UK property market?

One nationality is already blazing a trail of sorts and could heavily influence the market this year. Continuing capital outflow from China, whose investors are now looking further afield for profitable investments are noticeably more active in the Mediterranean - property yield prospects on the expectation that euro zone interest rates will remain near record low levels and the potential for investors to benefit from income growth are pushing Asian interest in Italy, Spain and Portugal.

When it comes to the domestic market of owner-occupiers however, Brexit may not make much of a dent as far as domestic supply and demand is concerned. With the continuing demand-supply imbalance - demand will still reign supreme. House prices are largely informed by incomes. So, the Brexit question when it comes to housing is, whether it will affect the trajectory of income growth. Long-term, it’s hard to see any step-change difference. But, if the government wants to increase property stock, foster stable housing market conditions with an uptick in mortgage lending, more investment in housing, including new funding sources - uncertainty may mean buyers might not get as much of a return as they might get with stability.

Traditionally, general elections tend to have a comatose effect on house sales, particularly on the higher rungs of the property ladder, as buyers weigh up whether to buy investment properties, rather than simply upsizing for extra square footage. Last year’s election was a notable cliff hanger, as it raised the threat of Labour’s mansion tax. As such, the prognosis is perhaps more cut and dried. In fact, the Brexit prospect is already hitting the value of sterling where it hurts, with a nose dive anticipated if Britons vote to leave. Cue London Mayor, Boris Johnson’s bombastic show of support to a Brexit, with an ensuing sterling fall-off to a seven-year low against the US dollar.

Top investment banks including Goldman Sachs have warned a Brexit could cut sterling by a fifth in value as investors flee the pound. Those with a footprint in London may choose to sell up rather than watch their assets lose value as sterling falls. For sterling – fun and games will not be the order of the day. More the uncertainty that will weigh on the currency, rather than investors taking a view on the outcome and the implications for the economy, which are hard to argue either way.

PCL relies on foreign investment – a weighty 49%. London property is seen as a "safe haven" asset: it retains or increases its value and is protected by the stability and security of a liberal democracy. When political turmoil and economic crisis lay siege, investors pour their capital into expensive property to shelter it. While much of the London market is affluent oligarchs from the former Soviet Union and Gulf monarchies, rich Eurozone citizens have also used London property to escape the sovereign debt crisis and ongoing economic malaise.

In fact, European citizens make up 15% of the prime central London market. Capital moves freely in the EU making it easy for Europeans to invest in London. When the radical-left Syriza party won the January 2015 election in Greece, on an anti-austerity platform, leading financial institutions in the City running property investment funds were lapping up attention from wealthy Greeks. Brexit may well cost London property its safe-haven status among Europeans, at least, as those already invested could sell up and look elsewhere in the EU, while others may be deterred from investing altogether.

It isn’t rocket science. By staying connected to Europe we remain influential. A Brexit will likely stifle investment at the top end of the market, not to mention the private rental sector whilst reducing capital flows into the UK, with a corresponding fall off in foreign funded developments. With uncertainty already weighing in on the pound and currency devaluation on a knife-edge, do we really want to risk a dampening effect on housing turning into an all-out rout?

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