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Funds & Gains: The impact of Brexit

Brexit has made waves not only in Britain but also across the globe.

The vote to leave the EU no doubt affects UK citizens and residents, but will certainly also have an impact on the rest of the world. A financial expert weighs in on the post-Brexit situation in the UK property market and how this will affect those from other countries.

by Paul Ho

A union that was established out of a desire to have peace among countries in a divided and war-torn continent, the European Union (EU) is a political-economic confluence of 28 member states with a total population of more than 500 million.

Through the EU, a single, large market where the flow of goods and services became easier via tax-free trade was created, benefiting all members, including the United Kingdom (UK).

It allows its citizens freedom of movement among the EU countries, translating to additional educational and vocational opportunities, especially for those in developing EU countries. At the same time, it has helped to rein in richer countries, support weaker countries, and prevent future wars.

However, on 23 June 2016, the UK shocked the world with the result of its referendum — in which everyone of voting age could take part — when 52 percent of the participants voted to leave the EU.

Still, it may not have been that surprising, considering the UK’s perceived loss of sovereignty as part of the EU, and the latter’s cumbersome, divergent economic performance has led to difficulty in implementing a single monetary policy.

For example, though Germany managed to balance its accounts and appeals for austerity, many EU member states have high budget deficits and high unemployment rates, and may need stimulus to ensure more people are gainfully employed. This divergence is also a cause of unhappiness.

Costly directives and regulations on just about anything from bread to milk to pavements all in the name of harmonising product specifications for trade, is a top-down bureaucratic approach that serves to create trade barriers for those outside of the EU.

The bureaucrats who set these regulations and directives are not democratically elected and not accountable to the electorate, causing considerable dissatisfaction amongst the people.

But what does the Leave vote mean for properties in the UK and those looking to enter that particular market? Here are some points to note.

On properties in the UK and on local buyers

Because of the Leave vote, it is highly likely that banks in the UK are going to impose stricter rules when it comes to loans. This lingering uncertainty is expected to affect lending activity, and the willingness of banks to take risks is also expected to decline.

Banks in the UK, in general, may start to reduce the loan-to-value (LTV) lending limit, which will have an adverse impact on transactions and property prices. Therefore, this may lead to a situation in which property buyers are required to fork out more for down payments.

Despite this, Brexit’s impact on UK property investments are not expected to have a massive effect on UK residents looking to secure loans, as banks there are unlikely to put a complete stop to lending, especially with the Gross Debt Servicing Ratio (GDSR) remaining in place.

UK-based property developers with most of their assets in GBP (pounds), and who are developing properties for UK buyers, are also likely to experience only minimal impact, except for some restrictions and tightened lending in the short term.

On foreign developers and buyers

Foreign property developers in the UK developing properties for UK residents will likely face short-term currency exchange losses due to the pound’s depreciation in the near term, if they report their earnings in a currency other than GBP.

Property developers will be faced with the increased cost of construction at the bottom line, as well as restriction of pricing power at the top line, due to diminished leverage from banks.

As local UK banks may restrict or reduce lending to non-UK residents, lower-price quantum units may see lesser impact.

Without access to leverage, the segment of borrowers who typically need financing for their investments will dry up. This may pave the way for cash-rich foreign investors eyeing UK properties as a way to enter the market.

These buyers will then allow property developers building those “best-in-class” properties in the most prime and sought-after districts to still be able to move their assets if they are willing to negotiate.

On the overall property market

The depreciation of the pound presents buying opportunities in good locations. However, any buyer intending to take advantage of this will need to be more financially liquid, and prepared to hold on to the property for a longer period of time.

The cost of financing a property purchase in the UK may also increase, as the London Interbank Offered Rate or LIBOR (see Figure 1) may rise in response to possible speculative attacks on the GBP to combat capital outflow.

FG 104 01
FG 104 01

 

 

 

 

 

 

 

 

 

 

 

Overall, London may still be an attractive destination for investments, particularly for foreign direct investments as they may now see lower property prices. There is also the possibility of lower real estate rentals, lower industrial and commercial property prices, and lower staffing and relocation costs for corporations looking to send their personnel to the UK.

Beyond property

With the UK’s exit from the EU, there will be some political uncertainty, especially with the change in leadership; UK citizens and residents in particular will need to get accustomed to the handing over of the reins from David Cameron to Theresa May.

The UK will also have to quickly develop trade missions to pull closer to China, the rest of Asia, USA and other markets. UK is the second European country that has joined the Asian Infrastructure Investment Bank (AIIB), just one day behind Luxembourg.

There are also 15 to 20 seats on the board of AIIB, of which only three are reserved for non-Asian members. There are seven countries vying for these three seats.

The UK is an economy robust enough to survive leaving the EU. In reality, the EU seems to have become a trade bloc where regulations are highly difficult to understand. The UK, on the other hand, is a top choice for foreign direct investments. By leaving the EU, its budget deficit will improve from 4.5 percent to 3.5 percent.

While capital inflows may slow down due to uncertainty regarding Brexit, funds may still choose to remain in the UK. As the UK pound has weakened, exporters now have greater international competitiveness.

On the other hand, LIBOR may rise at times to combat potential fund outflows. If the markets attack the pound again, the LIBOR may rise to cushion the impact. This will, in turn, affect financial products pegged to the LIBOR.

Finally, we will likely see the UK turning its attention towards the East again, as it has done in the past.

However, as the exit negotiations have not started, it is hard to predict the outcome. We can definitely expect a few surprises and some volatility.

Paul Ho is the founder of www.iCompareLoan.com

Disclaimer: The opinions expressed herein represent that of the author’s and do not necessarily reflect the view of PropertyGuru, its management, or employees. Information provided in this publication is general in nature and does not constitute professional financial advice. PropertyGuru will endeavour to update its publication and website as needed. However, information can change without notice, and we do not guarantee the accuracy of information in the publication or on the website, including information provided by third parties, at any particular time.

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