Brexit: property and investment experts' analysis

Here, Faisal Durrani, the head of research at Cluttons, the international property consulants based in London, tells The National what Brexit means for Middle East investors in UK real estate: “Any US dollar or UAE dirham investors will find the price of an average prime central London residential asset US$96,000 (Dh350,000) less than it was […]

Here, Faisal Durrani, the head of research at Cluttons, the international property consulants based in London, tells The National what Brexit means for Middle East investors in UK real estate:

“Any US dollar or UAE dirham investors will find the price of an average prime central London residential asset US$96,000 (Dh350,000) less than it was on June 20. Conversely of course, London residential property is now $96,000 cheaper for international buyers looking to enter the market.

“A silver lining today is that those from the Arabian Gulf eyeing up a London residential asset will find it 31 per cent cheaper than it was during the last market peak in Q3 2007, suggesting that we may be on the cusp of seeing a significant resumption in property investment activity in the British capital, mirroring the results of our recent Middle East Private Capital Survey, particularly as global investors seek out safe haven assets such as gold and London’s bricks and mortar, which we expect will retain its appeal”.

“The longer term implications are too early to assess, but we may start to see the unlocking of London’s stalled residential property market, with investors both exiting and entering the market as we head towards a period of demand volatility.”

Here, London Central Portfolio, a specialist London-based residential investment advisors focusing on prime central London property, tells The National its views on Brexit:

“Prime central London real estate is expected to benefit from a flight to quality and the security of blue-chip tangible assets, against a background of highly volatile financial markets.”

“It is now likely that property prices in prime central London will increase. Whilst LCP had originally predicted that this would not occur until 2017, the signs are that the re-entry of investors into the market will be more rapid than originally expected. LCP have received a stream of enquiries from the early hours of this morning,” said Naomi Heaton, the chief executive of LCP.

“In light of the anticipated appetite, particularly from foreign investors, LCP has decided to make a second share offering available for its quoted property company, London Central Apartments III, which exclusively invests in the private rented sector in Prime Central London,” she said.

The impact of Brexit has been amplified the world over by the shock resignation of the prime minister David Cameron, compounding the uncertainty caused by the departure of the UK from the EU, LCP said.

The fall-out for the UK property market, however, will, without doubt, be two-speed. The domestic market is affected by local factors, in particular the economy and employment. Both of these may suffer from the reverberations of the vote announced today and the uncertainty surrounding the future of the governing Conservative party.

While the political upheaval of the monumental changes that have come into play this morning is undoubtedly going to have a fundamental effect on financial markets, of which London plays such an important role, it is expected that prime central London (PCL) property itself will see a surge of activity. It is expected that PCL real estate will benefit from a flight to quality and the security of blue-chip tangible assets, against a background of highly volatile financial markets. Movement in gold prices, to which PCL is historically closely aligned, has already increased by 5 per cent.

Prior to the referendum, sterling had already been driven to lows not seen since the Global Credit Squeeze, with US$ denominated investors enjoying discounts of almost 1/5, cancelling out the recent unwelcome increases in UK property taxes. Today, as of now, sterling has dropped a further 10 per cent and is predicted to drop significantly more in the short term.

According to UBS, the Bank of England will at the very least keep interest rates on hold, but a cut is very likely. Other forms of stimulus are also possible. Alongside domestic homeowners, this will benefit investors into the Central London property market. It should be recalled that the dramatic bounce back in PCL was supported by a weak sterling and falling interest rates during the credit crunch. Prices rallied within one year and outperformed almost all other financial indices.

While markets are reeling in shock and assimilating the news, a short-term downturn in financial markets is undoubtedly expected. However, it is also anticipated that they will recover over the two year Brexit negotiation process and London will continue to hold its position as a financial powerhouse.

It should be remembered that international investors have always been, and will continue to be, attracted by PCL’s reputation as an aspirational, cultural, and educational centre. They are reassured by its rule of law and unequivocal title to property when it comes to ownership. All factors unaffected by the UK vote to leave and which investors worldwide will continue to find attractive, even as the UK embarks on the path of being an independent power outside the European bloc.

It is also worth noting that the EU has played only a limited role in attracting international capital to the London property market, with only 12 per cent of buyers coming from Europe according to LCP’s research. In the unlikely event of a wholesale withdrawal of European buyers, there will be very little net effect on the market.

Instead, it is predicted that there will be a surge of new buyers, who have been poised on the side-lines awaiting the results. LCP, as a real estate investment advisory, specialising in Prime Central London, has already received a stream of enquiries from Asian and Middle Eastern investors from the early hours of this morning.

This year, prices in PCL softened in the face of a whole raft of global issues – falling oil prices, continued uncertainty in China and tax headwinds at the top end of the UK property market – and had already factored in the impact of an out vote. Price growth in central London had tailed off from its 8.7 per cent long term annual average to 4.7 per cent while investors adopted a wait-and-see attitude. It is now likely that the market will harden and whilst LCP had originally predicted that this would not occur until 2017, the signs are that the re-entry of investors into the market will be more rapid than originally expected.

As LCP predicted in its recent analysis of the impact of an “out” vote, international buyers are now likely to capitalise on a weak sterling and a competitively priced market.

Here, three chief investment officers from Neuberger Berman, a New-York based private, independent, employee-owned investment management firm, Joseph Amato, Erik Knutzen and Brad Tank, tell The National what their take on Brexit and its possible repurcussions are:

This time the opinion polls got it right. The “Remain” and “Leave” camps were running neck-and-neck coming into yesterday’s UK referendum on membership of the European Union and in the event some 52 per cent of UK voters opted to reject the status quo and pull out.

Markets have responded dramatically. UK equity index futures have slumped and the pound sterling has tumbled to 1980s levels. Havens such as gold, German Bunds and US Treasuries are seeing substantial investor demand. The euro has also come under pressure.

No doubt this will be the first of many volatile trading sessions, and the major central banks may intervene if necessary. But we caution against reacting as though this were a second “Lehman moment”, as some commentators have suggested.

The likelihood of at least medium-term damage to the UK economy from a “Leave” vote, as well as pronounced market volatility on the back of political uncertainty for the UK and the EU as a whole, did lead our Multi-Asset Class (MAC) team to adopt a relatively neutral stance coming into the vote. This stance was not only designed to try to buffer against volatility, but also to position the MAC team to take advantage, potentially by increasing allocations to riskier assets based on a longer-term view of fundamentals.

Still, the UK has chosen the rockier of two paths. It piles up the political distractions that have dogged the administration of UK prime minister David Cameron and his chancellor, George Osborne. The “Brexit” camp is clearly in the ascendant but the vote revealed a lack of national consensus. And even consensus would not wish away the complexity of this exit, a “monumental,” multi-year task in the words of one legal expert.

That complexity is likely to prolong the period of low corporate investment we have seen leading up to the vote, both within the UK and in the form of foreign direct investment. This, together with the higher costs of trading, is what led mainstream economists to forecast a 3 to 7 percentage point negative long-term impact on UK GDP.

The pain may not be felt evenly. Many of the large companies in the FTSE 100 Index are global rather than UK businesses – 80 per cent of the index’s revenues come from overseas. This should help insulate them from any domestic downturn and potentially deliver a windfall from the weakened pound. Smaller, more domestically-focused companies are more vulnerable to a fall in consumer demand and higher import costs. That could be a source of opportunity during a sell-off in UK assets, particularly if the UK makes its new status work over the longer term.

Elsewhere, the economic impact is likely to be felt most keenly in Europe and, in the words of one Federal Reserve Bank president, to have only “moderate direct effects on the US economy in the near term.” Again, we expect an excessive market reaction to be a potential source of opportunity.

A more pessimistic reading of the vote would see it as one more crack in the edifice of international political and economic co-operation built over the past 70 years. Anti-EU parties in countries like France, Germany and Italy may take heart from the result and attempt to further exploit the euro-skepticism increasingly evident in opinion polls across the Continent.

But to us this merely confirms that globalisation is under siege, a trend already well-advanced and understood by financial markets. Beyond Europe, a big effect on the outcome of the forthcoming presidential election is unlikely – and besides, as the former Treasury Secretary Hank Paulson told us in an exclusive interview at our CIO Summit last week, neither the Republican nor the Democratic candidate is promoting a positive view of global trade and investment.

Most importantly, this vote will probably exert only a marginal effect on global economic fundamentals, which remain stable but weak. We still live in a slow-growth, low-inflation, low-interest rate environment, characterized by sluggish productivity and investment. Brexit has been a tail-risk stalking markets in the same way that the oil price, the strong dollar and concerns about China created volatility back in January and February, but we think its implications are overstated. For that reason, we again stress the importance of looking through the noise to focus on fundamentals and watching for opportunities to add risk to portfolios. The market reaction may provide opportunities to add to some positions in riskier assets once the worst of the initial volatility has passed.

Looking further out, in a lot of places in the world we still need structural reform and a more appropriate fiscal response to the current malaise if we are going to allow our economies to grow on a proper footing, and our companies to generate sustainable earnings growth. Part of that progress will involve addressing the legitimate concerns of those who have failed to benefit from globalisation, but populism and political division is not the way to do it. In that respect, today’s result is hardly good news. But we believe its effect will be marginal and the market’s initial response is likely to create opportunity for patient investors with cool heads.

Joseph V Amato is President of Neuberger Berman Group and the chief investment officer – equities at Neuberger Berman. He is also a member of the firm’s board of directors and its audit Ccommittee.

Erik L Knutzen is a managing director, and Multi-Asset Class chief investment officer at Neuberger Berman.

Brad Tank is a managing director, chief investment officer, and the global head of fixed income at Neuberger Berman.

Source: Business

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