Knight Frank commentary – Brexit: Impact on real estate investments

Knight Frank commentary - Brexit: Impact on real estate investments

27 June 2016, Kuala Lumpur, Malaysia

Prime UK Residential

Liam Bailey, Global Head of Research

“There is no doubt that the vote in favour of Brexit will generate a period of renewed uncertainty in the prime London residential market. Some demand, especially from investors, will be delayed and in some cases redirected to other markets – although the significance of these trends should not be overstated.

“Demand for prime London property rests on a wide range of drivers – most of which are unaffected by the referendum decision: the scale of London’s business cluster, depth of skills, education, lifestyle and language. It is not easy to identify an obvious alternative destination for investors despite short-term nervousness.

“While we are entering a period of renewed uncertainty in the UK and London market, ongoing issues around EU and especially Eurozone stability, which will be highlighted in the run up to French and German elections, are likely to counter this risk and shore-up London’s safe haven appeal.”

Asian investors

Nicholas Holt, Head of Research for Asia Pacific

“The UK has long been a destination for Asian real estate investors, with the attraction of the strong liquidity, stable governance, transparency and clear title, meaning that investors from China, Hong Kong, Singapore, Malaysia and Thailand have all invested in bricks-and-mortar in the country.

“With the decision to exit the European Union, for existing Asian property owners, the fall in the pound will impact the repatriation of any income returns, as well as the gains on any disposal. Although there is likely to be more volatility in the market, ultimately most investors are looking to the long term – so will continue to hold their assets, in the hope that any short-term instability will eventually subside when more clarity of the UK’s role in Europe is determined.

“The decision, however, could also present a buying opportunity, as the significant drop in the value of the pound, as in 2009, could lead to an uptick of interest by Asian investors, who, over the last few months have adopted a wait-and-see approach to the referendum – and will now see their buying power increase significantly.

“Chinese, Singaporean and Hong Kong investors especially, looking at both commercial and residential properties – most likely in London – will be monitoring the market carefully and looking for opportunities to potentially increase their exposure over the coming weeks and months.”

Interest Rate

James Roberts, Chief Economist

“One of the first outcomes from the result of the referendum is that the value of the pound will inevitably fall in the near-term, as will the stock market. The chances of a technical recession, as business investment is curtailed, is high, and exporters and financial services firms will be in the forefront of the downturn.

“In the light of the above risks we expect the Bank of England, seasoned by the experience of Global Financial Crisis, to respond quickly. An interest rate cut of 25 basis points is a strong possibility at the Monetary Policy Committee’s July meeting, or perhaps earlier if required. We may also see a return of quantitative easing, if there are signs that investment is deteriorating. This should in our opinion help restore confidence as the summer progresses.”

UK Residential

Grainne Gilmore, Head of UK Residential Research

“The UK vote in favour of Brexit has the potential to make a relatively swift impact on the housing market. The scale of this effect, especially in the medium to long-term, will depend on the outcome of negotiations on the UK’s exit.

“In the short-term, consumer confidence is likely to be knocked by the continued uncertainty, especially with regards to trade. This may weigh on activity in the market, especially those making discretionary purchases, which could result in a slip in transaction volumes, and prices. However, uncertainty could also result in a further dampening of homes coming onto the market, and this lack of supply will provide a floor under prices.

“In the longer term, any increase in inflation could trigger base rate rises, which would again translate into higher mortgage rates. This scenario would be more challenging for those on variable rate deals. If house prices are also declining, this will put the most pressure on highly leveraged borrowers.”

Office Occupiers

Lee Elliott, Head of Commercial Research

“Yet uncertainty for business firmly remains. It is therefore, inevitable that business behaviour will be stifled over the short-term and that the recent delays in occupier decision making will persist.

“Despite this, over the medium-term there are reasons to be positive. First, the pessimistic scenarios highlighted during politicised campaigns often fail to emerge. Many business commentators pointed to Britain losing out if we failed to join the Euro, but history has shown that this did not deter inward investment. Second, recent history has proven business to be highly skilled at adapting to changeable operating environments. Third, as the dust settles, and the economy stabilises, businesses will reconnect with the fundamental qualities of the UK as a business location; ranging from corporate tax rates, to the large consumer market, to the GMT timezone.”

Commercial Investment

Mark Clacy-Jones, Head of Data & Analytics, Commercial Research

“Uncertainty over future economic conditions in the UK will cause some deals on hold to be shelved, and occupiers will reconsider the amount of space they need outside of the single market.

“A fall in the value of sterling, combined with falling property values will be a buy sign for opportunistic overseas investors once the initial correction has occurred. This will cause a widening yield gap as real estate yields rise and bond rates fall from further Bank of England monetary loosening and will make property a favoured asset class in an unpopular investment destination.”

 

To download the full report, please visit:

http://www.knightfrank.com/research/eu-referendum-comment-june-2016-3864.aspx

 

 

 

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