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Investing in the age of Brexit – risk and reward
July 23, 2018Article by Paul Avery
Whatever your personal standpoint, it is fair to say that Brexit has thrown UK politics into disarray, with clarity and consensus taking much longer to emerge than they ought to. Mrs. May’s latest pitch at her Chequers summit was not the turning point it was billed to be, and the headlines don’t inspire a great deal of confidence at the moment. This is a great shame, but how much pause should it give prospective property investors?
It is our firm belief, forged through years of experience investing during the financial crisis and a succession of now-forgotten political controversies, that the uncertainty around Brexit represents as much opportunity as risk.
The core threat presented by the various possible Brexit outcomes is that of economic contraction. However, that is by no means ensured in any of those circumstances, with even a hard exit being (perhaps optimistically) described by its supporters as a chance to renew the buccaneering prosperity of the UK’s historic global dominance.
At this stage it is impossible to know which path the UK will take and how much the economy will be impacted, but an actual recession that has a lasting effect on the property market is very much worst-case scenario stuff.
There is no question that slower economic growth is a bad thing for the housing market, but it tends to mainly and temporarily effect the market for buying and selling. For the time being, and likely beyond exit date, the UK can no longer be counted on for double digit annual capital growth (though that isn’t something we would advise investors to be counting on anyway).
The market has already been halted in certain places (generally the expensive ones), but it has also been ignited in others. Brexit is already causing a redistribution of house price gains across the country – opening up new opportunities as old ones fade.
Investors should take advantage of these shifts to identify places where affordable stock offers strong yields and rental demand is likely to remain high. It would take a whole lot of trickle-down economic harm to impact the national rental market. In fact, in times of hardship rental demand goes up as mortgages are viewed as riskier.
But successful investors will again be paying attention to local conditions: while some areas where financial services companies for example are panicking about Brexit, fewer jobs could indeed mean fewer future tenants, but at the same time, other places where employers are continuing to invest could do better than before.
The job of an investor is to balance out the possibility of future gains or losses against the strength of the present opportunities available to them. It is our opinion that any future decline in the UK housing market is unlikely to outweigh the strength of the opportunities currently available – nor some of the additional incentives available in the present moment.
UK assets are very cheap if your bank account is in another currency (offering a 22.6% discount on average for European currencies). And if your money is in pounds, the exchange rate makes international assets proportionally more expensive than UK ones.
As we have put forward elsewhere, the largest possible change in the value of the pound is most likely behind us (sterling volatility has remained within a low range throughout 2018 so far despite parliamentary squabbles), so buying at a juicy discount now and then receiving income that rises with the return of the pound to its long-term average would be an advantageous position for an investor to be in.
The window for UK-based investors is less obviously golden, but we are currently in a buyer’s market in many locations, and waiting for the national market to reboot or for the currency to recover and make foreign assets better value means enduring an indefinite period in which your money is not working its hardest for you.
A fundamental imbalance of supply and demand remains the lynchpin of the UK market, and that is not about to change anytime soon – Brexit or no Brexit.