Safe haven no more?

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/ The Edge Property
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July 1, 2016 10:00 AM SGT
Mr and Mrs Chris Robertson, a British expatriate couple living in Singapore, are representative of households across the UK on the issue of Brexit — whether Britain should leave the European Union. “It was a split household,” says Mrs Robertson. Her husband believes the UK should remain in the EU, while she is a “Leave” supporter, the group that emerged victorious after the referendum on June 23.
The result has had a seismic effect not just on stock markets and the British pound, but also the UK property market. The Robertsons had put their three-bedroom apartment in Greenwich for sale in early June. “There were few viewings,” says Mrs Robertson. “The agent said people were waiting for the Brexit outcome. And now that the verdict is ‘Leave’, there appears to be more uncertainty.”
The apartment is still on the market with a list price of £650,000 ($1.18 million), which is pegged at valuation. “We’re in no hurry to sell. If it’s not sold within a year, we will carry on renting it out as the tenant is on a rolling contract. And we’ll not sell it until five to 10 years later.”
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Residential development looks less likely to be affected, given the structural shortfalls in supply in many UK markets, particularly in London, says CBRE

Source: Bloomberg

Panic mode?
Not every UK property owner in Singapore is as sanguine. “Many investors have called to ask for our opinion on whether to hold or sell and are in a panic mode,” says Singapore- based Monty Nawaz, founder of Saffron Homes, which specialises in London property. “I’ve always warned investors against buying overpriced off-plan units for many reasons, including the difficulty of an exit strategy to local London buyers. Capital appreciation, coupled with currency risk, remains a challenge.”
People are not pulling out of their UK investments just yet, and there is no panic selling for now, says a property industry observer. “Some investors who were looking at UK property and have not committed to a purchase are using the current uncertainty as an opportunity to press down prices,” she says. “Most investors, however, are putting their buying decisions on hold and waiting to see how things will pan out.”
People are not pulling out of their UK investments just yet, and there is no panic selling for now, says a property industry observer
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Over the past two years, the UK property market has weathered the Scottish referendum in 2014 and a number of budgets targeted at the prime UK property market. It now faces the outcomes of the recent Brexit referendum, the upcoming election for the UK’s next prime minister and the eventual exit from the EU. “What a lot of businesses feared was not Brexit, but the uncertainty it would create,” writes Matthew Davies, director of Opes Financial Partners, a London-based boutique brokerage firm, in a June 24 note to clients after the referendum result.
Davies reckons that the segment most affected by Brexit will be the new-build market, where there has been a lot of speculative buying, and developers need to sell to maintain cash flow. The impact on the new-build market may be lessened, however, as tax changes for overseas and buy-to-let investors introduced in recent years have already taken some of the froth off the market, he adds.
Prices in prime central London increased only 0.8% in the year to March, and 0.5% in April, its lowest figure since October 2009, when a 3.2% decline was recorded as the market readjusted following the collapse of Lehman Brothers, according to Knight Frank. The more muted performance is a result of a series of taxes that came into force, notably, from April 1, with buy-to-let investors and second- home buyers having to pay a 3% stamp duty surcharge on any UK purchases.
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Households across the UK were divided in the Brexit vote
--thisisapagebreak
Rise in development, construction risks
The “Leave” vote does not reduce pent-up demand in the UK housing market, says CBRE Research in its report following the referendum. “However, the prospects for mainstream residential [market] hinges on consumer confidence. So, in the immediate aftermath, we expect a quiet summer for sales as buyers consider the wider economic implications.”
If the economy were to slow drastically, low interest rates would mean forced sales are unlikely. “We don’t expect a marked negative impact on property prices,” notes CBRE. “Indeed, if developers scale back and new housing supply contracts significantly, there may even be upward pressure on prices.”
Development and construction activity is likely to be affected by Brexit, says CBRE. Developments that have not started on site are likely to be delayed until there is more clarity about the level of demand in the economy.
In central London, for example, over six million sq ft of office building development will complete in 2016, the highest number for more than a decade, and a similar amount is expected to complete in 2017. The amount of planned development in 2018 and 2019 is even higher, at over 13 million sq ft. Less than three million sq ft of floor space due to become available in 2018 and 2019 has actually started on site. “And we doubt that much of the remaining 10 million sq ft will start until the conditions are clearer, resulting in new supply restrictions from 2018 onwards, which will sustain prices,” notes CBRE.
Residential less affected?
Residential development looks less likely to be affected, given the structural shortfalls in supply in many UK markets, particularly in London, says CBRE. Even then, housebuilders are expected to proceed with caution. “Although this caution is unlikely to be as dramatic in its effect as the collapse in new supply in 2008 and 2009, it could well push prices up in the short term if demand is sustained.”
An influx of EU migrants in the immediate aftermath wanting to put down roots before the restrictions come into force, could significantly push up migration and demand for rental housing in the next two years, reckons CBRE.
There is still a deficit in housing supply, however, with the UK government calling for 300,000 new homes a year and developers struggling to build 120,000 new homes a year, says Opes Financial Partners’ Davies.
According to UK’s Office of National Statistics, immigration is likely to fall about 40% from 333,000 to 185,000 a year by 2024. Despite this fall, there is still a projected demand for 137,500 homes a year, which is about the current rate for the UK as a whole, says CBRE. If net migration were to be cut further to below 100,000 a year, this will translate to demand for 111,000 new homes a year.
Chart
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Prime London — still a safe haven?
Prime central London may be exposed to greater risk, but the underlying fundamentals — lifestyle, safe haven and education — remain robust, argues CBRE. “Overseas investors, including institutions investing in large-scale build to rent and individual investors, may benefit from a weaker pound.”
Like most Londoners, Masood Rashid, director of Opes Financial Partners, was “shocked, dismayed and very upset” by the result of the referendum. Masood handles financing for foreign high-net-worth individuals, particularly those from Asia and the Middle East, in their property purchases. In the last UK financial crisis in 2008 and 2009, which resulted in the devaluation of the British pound, there was a surge in foreign investment into London real estate.
Masood reckons high-net-worth clients will once again look at this as an opportunity to invest in London. “We’ve already seen an increase in interest in central London,” he says. “With the weaker pound, exporters will do well. And after all, London real estate is an export to global investors.”
Prime London may be exposed to greater risk, but the underlying fundamentals — lifestyle, safe haven and education — remain robust
Currency arbitrage
Following the Brexit referendum, the British pound tumbled 10% against the US dollar to a 30-year low of US$1.35. However, as the pound continues to be volatile and the US economy is strong, “we could start to see US buyers being a force in the market — something we have not seen for a long time,” says Alex Newall, London-based real estate adviser for central London properties and managing director of Hanover Private Office.
The depreciation of the pound may have led to foreign exchange losses, which could have significantly decreased overseas investors’ returns, reckons Megan Walters, JLL’s head of research for Asia-Pacific capital markets. “Paradoxically, investors may well identify opportunities in this market over the short term, particularly international purchasers who can benefit from the currency arbitrage that has been opened up by a weaker pound.”
There is no doubt that there are investors who are seeking just such a currency arbitrage opportunity, says Vanessa Chan, JLL’s associate director of international residential property services, who has been receiving a lot of calls from clients about the impact on London property since the Brexit referendum.
The British pound is also at a historic low of $1.80 to $1.82 against the Singapore dollar. Some view the current period of uncertainty as a window for opportunistic buyers who have not purchased property in London yet, says Doris Tan, regional director of Singapore and Hong Kong at UK property group Strawberry Star. “If you were to buy in London now, you should buy in central London,” says the 30- year veteran in marketing overseas property, particularly the UK.
‘Wait and see’
“In the short term, there seems to be chaos,” says Tan. “But over the long term, people still favour London because of long-term ties — education, work and family. For now, everyone is adopting a wait-and-see approach.”
Hanover’s Newall agrees. “Foreign investment may pause before pouncing on the property markets,” he says. “This is not the time for a knee-jerk reaction.” In the short term, investor sentiment will be subdued, with real estate investment deal flow slowing while the period of volatility persists. “We will see the volume of transactions increasing over the next six months,” comments Newall.
In the meantime, even UK developers are cautious. “I’ve been in touch with some of the UK developers, and they say they will only consider new launches sometime in the last quarter — after September,” says Strawberry Star’s Tan. “They are telling me to go on a summer break.”
Underlying demand
Sectors such as student housing, assisted living (retirement homes) and supermarkets — basic needs businesses — will see more interest than luxury or discretionary markets, predicts Hanover’s Newall.
In the London housing market, demand will remain strong in the heartland residential neighbourhoods, as there is an acute shortage of supply and high demand from local first time buyers for affordable homes, says Saffron’s Nawaz.
Outer London and regional growth cities such as Manchester, Birmingham and Liverpool — where the market is driven by population growth, economic growth and infrastructure investment — present the best growth opportunities, according to Sing Mei Sha, director and head of Southeast Asia at IP Global. “We’re also keeping a close watch on prime central London for any opportunities in the future.”
According to Nationwide’s latest monthly survey on UK house prices, m-o-m prices grew just 0.2% in June, the same rate as in May. However, on a y-o-y basis, house prices grew 5.1% in June, compared with 4.7% in May.
Predicting how UK house prices will perform post-referendum will be a challenge. “We can no longer use past data to accurately predict the future,” remarks Hanover’s Newall. “Over the next two years, until Brexit actually happens, the rule book will be gradually rewritten on asset prices in the UK.”
This article appeared in the The Edge Property pullout of Issue 735 (July 4, 2016) of The Edge Singapore.