Whats your BREXIT strategy?

Whats your BREXIT strategy?

You’ll have seen the posturing in the press, of course, and for heavens sake - anyone could be forgiven for imagining that the world was about to end, whether the June referendum sees a vote to stay in, or to leave, the EU. Lets take a brief tour through the facts, so you can make up your own mind on the most important question of the year - no, not Brexit! - how the referendum is going to affect the market, and thus your bottom line.

A reasonable man might well ask whether the EU - now more a geopolitical bloc than the economic entity it was originally conceived of as (the EEC) - really has all that much to do with the property market in our capital? Well, London is more exposed to the global market and immigration trends than other cities.

We’re already seeing a cautious market, echoing the months before the General Election last year, and of course the 18-month lead-up to the Scottish referendum (which saw transactions 10% lower than normal). If we vote to stay in, it’s pretty widely accepted that the market will be back to normal in a matter of weeks. Confidence will return to the market, acting as a stimulus to residential property value, which will rise broadly in line with projections that pre-date the referendum’s announcement. For owners in the capital, that’s good news. A BNP Paribas report from April 2015 forecasts a rise in value of 46.4% (for homes worth less than £1 million) by 2020.[12] That sounds about right - the year to November 2015 saw an increase of 10.6%.[13]

But how would an ‘out’ vote impact on the property market? Well, in terms of lettings, I’ve heard anecdotally that landlords are concerned. If businesses leave the UK in the months and years following a Brexit, tenant demand will fall, leading to a drop in rental prices. More immediately, if an EU citizen works for a British firm, whilst visas could be arranged for some, there is a cap on the number that are available. The minimum salary requirement for a visa alters depending on how many people apply (since June last year, it has varied between £24,000 and £46,000), so in the case of a Brexit, only the higher-paid could expect a visa in the short-term.[17] This could lead to the lower end of the rental market returning to the Eurozone. To quantify all this, EU migration represents about half of total net migration to the UK,[17] or 172,000 people in the year ending September 2015.[18]

As for residential sales, strong demand and investor confidence are the keys to the seemingly ever-increasing prices we are currently experiencing. The value of sterling is forecast to drop sharply if the public vote to leave.[1] In the best case scenario, this will herald a quiet period in sales, which will likely last until the details of a Brexit are worked out. We might see a small fall in values at this stage, as confidence drops and the market adjusts.

With that said … in light of the so-called ‘turnover tax’ starting in April 2017 (and being phased in gradually until 2020/21), falling rental yields could have significant unintended consequences, forcing more landlords to sell off significant parts of their portfolio. Indeed, the proportion of London landlords intending to sell has already increased from 4% to 19% since summer 2015.[14] If too many sell at once, then rather than simply a gradual fall in yields as long-term rental demand fluctuates and re-balances, the result could be a rapid fall in property values. If this is limited to domestic confidence and holdings, that’s one thing. If the timing of this market activity hurts the confidence of foreign investors already nervous about the potential impacts of a Brexit, that’s quite another thing, and could damage the market for years to come.

There are two specific risks here. First, whilst trade opinions are still divided and the evidence is not yet watertight, in general it appears foreign investors are already showing a more cautious attitude following the changes to stamp duty.[16] For instance, in 2015, purchases of new-build flats fell by 47% in Westminster and Kensington & Chelsea.[16] Secondly, the sheer number of new flats in prime riverfront areas due to come up for sale in the next 18 months poses a “bubble risk”, according to Nick Bosanquet at Imperial College London, who is predicting a 20-30% drop in values in this type of property due to falling demand from overseas investors.[15] If confidence is knocked by a vote for Brexit, we could see a perfect storm where domestic landlords try to get out of the buy-to-let game even as overseas investors - seeing rapid falls in value in flats - decide to divest themselves of their London holdings.

Of course, all of this depends - as much as anything - on the exact timeline surrounding a potential Brexit. It won’t happen in 2019/20 - that’s far too risky for Whitehall’s stomach. So, it’ll either be fast, in 2018, so the government has a couple of years to let the dust settle before a new election - or slow, in 2021/22, when the pain of any changes will be felt by the next incumbents. My money's on the latter.

In either case, as long as we avoid it happening in 2017, then we should avoid a rapid fall in property values (with the possible exception of new-build flats, due to the impending glut coming to market). And a Brexit is unlikely to be next year; it’s too fast, and risks crashing rather than knocking investment confidence.

Once the terms of a Brexit and a timeline are agreed, I’d suggest values will return to their pre-referendum levels, or perhaps even experience a temporary boost. After all, you only have to go back to the last global financial crisis to see foreign investors using cheap sterling as an excellent excuse to buy into London property.[1]

Will prices drop over the medium term - say, following Brexit? Yes, a bit. But in a city which has seen the median house price rising from £83,000 to £300,000 - expressed in income multiples, that’s 4.4 to 12.2 times the average income - over the last twenty years,[2] I’d argue it’s a good thing if we can take some heat out of the market.

The bigger question is, will prices rise again? Yes, absolutely. Domestic demand will remain high. Today, 8.6m people call London home,[3] and our capital is set to become a city of 13 million people within the next ten years.[4] Yet housebuilding targets are set at 42,000 new homes a year, and it’s widely accepted that this figure falls significantly short of the projected demand.[5]

It’s been argued by analysts with Credit Suisse that prices will drop over the medium term, due to “a drop in housing demand because of lower immigration and the UK’s changed status as a financial hub”.[6] Respectfully, I have to disagree with their assessment.

First, immigration is just plain not going to drop all that much. The EU accounts for about half of immigration, sure, but two-thirds of these arrivals already have a job lined up - which means they can largely come across on a visa. So really, we are talking about around a maximum drop of around 17% or 58,480 people a year, which - if last year’s figures continue - would mean the new net migration to the UK is still over 300,000 people a year.[7]

But more to the point, demand in the capital isn’t driven or limited by the numbers living in London. Daniel Valentine argued in his report for the Bow Group that, since there are now around 15 million financial high-flyers globally, “increasing housing supply can never bring down prices … because the demand for investment returns is almost infinite.”[8] And this is plausible. Indeed, in Kensington and Chelsea alone - an area which sees high foreign investment demand - [9] 7.3% of property has now been acquired by offshore companies.[10]

Let’s take the example of high-end property in the West End. Last year, 54% was bought by people from the UK, 19% by Europeans, and 27% by people in the rest of the world.[11] But we can’t presume that a fifth of the market would simply fall away due to a Brexit, because if almost one in three purchasers are managing to buy from outside the Eurozone now, there is no reason why ex-EU citizens would find it too arduous to complete on property deals.

The fact is, even in the event of a Brexit, London will remain one of the world’s premier cities and financial centres. Investors in China, Russia, and the Middle East will still want to shelter their capital. And London will retain its status as an attractive and safe place for capital investment - perhaps more so, when it is protected from the sorts of economic shocks (Greece, anyone?) that the Eurozone has seen over the past several years.

[1] http://www.ibtimes.co.uk/eu-referendum-what-brexit-would-mean-residential-property-market-uk-1545556

[2] http://www.theguardian.com/uk-news/2015/sep/02/housing-market-gulf-salaries-house-prices

[3] http://www.bbc.co.uk/news/uk-england-london-31082941

[4] http://www.telegraph.co.uk/news/uknews/immigration/11962140/Britains-population-to-hit-69m-in-the-next-decade-official-projections-say.html

[5] (Briefing Paper Number 07287, 4 September 2015: Meeting London’s Housing Need)

[6] http://www.theguardian.com/politics/2016/jan/25/brexit-would-trigger-economic-financial-shock-for-uk

[7] https://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/internationalmigration/bulletins/migrationstatisticsquarterlyreport/february2016

[8] http://www.theguardian.com/money/blog/2015/nov/21/foreign-buyers-british-property

[9] https://www.hwfisher.co.uk/publications/foreign-investors-to-be-hit-by-change-to-capital-gains-tax-on-uk-properties/

[10] http://www.theguardian.com/housing-network/2015/jul/31/london-housing-rent-shortage-corruption-luxury-property-boom

[11] http://www.independent.co.uk/news/business/analysis-and-features/london-falling-times-get-tough-for-luxury-property-in-the-capital-a6908711.html

[12] https://www.realestate.bnpparibas.co.uk/upload/docs/application/pdf/2015-04/investing_in_london_guide_2015_-_bnp_paribas_real_estate_uk.pdf

[13] http://www.propertywire.com/news/europe/england-wales-property-prices-2015112711255.html

[14] http://www.whatmortgage.co.uk/news/buy-to-let/proportion-london-landlords-looking-sell-quadruples/

[15] http://www.ft.com/cms/s/0/87652554-afa8-11e5-b955-1a1d298b6250.html#axzz43c9ct8wC

[16] http://www.independent.co.uk/news/business/analysis-and-features/london-falling-times-get-tough-for-luxury-property-in-the-capital-a6908711.html

[17] http://ukandeu.ac.uk/would-leaving-the-eu-reduce-immigration-to-the-uk/

[18]
https://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/internationalmigration/bulletins/migrationstatisticsquarterlyreport/february2016