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The aftermath of Brexit: business as normal
June 29, 2016Article by Ray Withers
The surprising Brexit result has undeniably already impacted on international markets, and as Founder and CEO of an international property company, I feel the need to share my thoughts on last week’s seismic events. What effect will Brexit (whether or not it actually goes ahead) have on global property markets?
I’ve waited a few days to digest, review the reactions of the markets and speak to some of our clients around the world in order to offer a more considered opinion. Initial reactions seem to be stoic and positive in equal measure and I’ve found it hard to cut through the noise and decidedly mixed media commentary. So, for what it’s worth, here is my summation of the situation, and a few thoughts.
Whilst it was unexpected, I really do feel that we have to accept the result, get on with it and cut through any adversity.
Change on this scale can create huge opportunities for those looking in the right places and smart investors stand to gain from the uncertainty of others in the weeks and months ahead. It’s now down to the UK government to lay out a clear timetable for the renegotiation of our relationship with the EU so that we can move onwards and upwards. One of the things I have learnt over the past 12 years since forming Property Frontiers is that today’s challenges could be tomorrow’s opportunities and I really believe there are some grounds for optimism.
What we saw happen in the markets and with sterling over the last few days is no surprise as markets always react badly to uncertainty. Whilst I can’t categorically state that everything will be fine, the British economy has solid fundamentals and we have to be careful not to let sentiment and fear become a self-fulfilling prophecy, talking ourselves into recession. The economic success of the past few years has meant that we are better able to withstand market turbulence and there are a number of tangible upsides (potential reduction of red tape, a more cooperative tax system, increased foreign investment, potential scrapping of Energy Performance Certificates (“EPCs”), reforms to the ‘right to rent’ policies to name but a few). We should not forget the clear evidence of trade relationships and political ties with Europe working without being a member, namely Switzerland and Norway.
We have good reason to be confident. The UK is an economic powerhouse, the world’s fifth largest national economy and it will continue to be a magnet for international investment. During the last parliament, more jobs were created in Birmingham then there were in France! I have spoken to a good few clients, property developers and investors over the past few days, and whilst many were surprised by what happened last Friday, others were more optimistic, and all are still overwhelmingly pressing on with their investment plans – for one main reason –market fundamentals.
Recent volatility in the bond and equities markets reinforces the case for real estate investment; the long term security of bricks and mortar. Fact is, the value of your asset cannot be wiped overnight unlike many other asset classes. Prices could soften over coming months but I cannot see sharp price falls happening. The underlying strength of property is sound and over the long term, property as an asset class will remain a solid investment if the right location is chosen.
Fundamentals of supply and demand dictate markets and there is a fundamental, chronic shortfall of property in the UK (and many other international markets we are in) right now, coupled with an ever-increasing demand. There simply aren’t enough homes available. This in combination with the potential further shortage of labour and increasing costs of imported materials could further squeeze the chronic shortage and hence push prices up in the right areas.
House prices may go up and down as they always have but I believe demand pressures will sustain prices over the long term where there is an undersupply and/or proven demand. The only property sector I would personally question in the UK right now is the high end market (due to potential reduced demand) and prime central London (which was already felt close to its peak pre Brexit).
There was a lot in the press about house prices falling but that depends on your perspective. Over the weekend there was a lot of competition for residential units for one of our Manchester developments from a group of international buyers as currency movements made buying in the UK more attractive. We have certainly seen a flurry of enquiries by clients who hold their money in foreign currencies (especially those in € and $USD) as the fall in sterling has made UK property so much cheaper.
A key part of any property investment is ongoing yield. I think we could see inflation rise as a result of the fall in the pound and the increased costs of trading with Europe but I don’t foresee the Bank of England raising interest rates any time soon as that could be detrimental to growth. J.P. Morgan have suggested that interest rates could actually fall to 0% in August. In my opinion, this will make bonds less attractive and push demand for property as a whole.
Having had chance to reflect, I genuinely feel that as an international company with many international investors, fresh opportunities will arise over the coming months. Although the UK government (in whichever form it takes) will have a challenge on their hands, together with the Bank of England, it will do all it can to create stability and calm in the market. That chance may be squandered if we react to the referendum result by turning our backs to the world.
Buyers, and in particular international investors, should continue to see the UK as a safe long-term investment with reliable returns from a vibrant lettings market. Other international and frontier markets with solid fundamentals should also flourish if chosen well. We have a resilient economy and shouldn’t let short term turbulence affect the longer-term upward trajectory. So it is business as usual here at PF Towers. Life and the market will carry on.