Following the significant events of the last few days, we wanted to update you with our thoughts on how the decision to leave the EU will impact the property market, and our business specifically.
Firstly, it’s important to note that, while we did not wish for this outcome, the majority of UK voters did vote for it and this is how a proper democracy works and is something we should be proud of. The key thing now is to move forward in a way that provides stability and prosperity for current and future generations. I have no doubt that our politicians will negotiate strongly for acceptable trade terms. Let’s not forget that we are a big trading partner to Europe and, as much as they might want to penalise us for leaving, they ultimately will have to trade with us. The downside is that, like Norway and others in the European Free Trade Association (EFTA), we will probably pay through the nose to retain certain key privileges such as passporting our financial services.
That being said, it is very likely that cracks will now start to show throughout Europe. Talk of referendums is already rife in many countries. This could be the catalyst to end the EU, however it is more likely to cause a broad-scale shake-up and reform of the EU. Perhaps even one that the UK will participates in. In the meantime, the uncertainty will affect the EU as a whole, and not just the UK.
From our perspective, the results of the referendum bring potential risks as well as opportunities.
Impact on property
In the build up to the referendum, it was suggested that investment in property had slowed. As stated in our previous notes, this was due to excessive supply at the top end of the market coupled with waning interest from foreign buyers. The lower end of the market actually remains very stable and there is still a lot of pent-up demand from first and second time buyers.
Going forward, we expect a few weeks of inactivity as buyers and sellers digest the news and look for some form of stability to make a decision. After that however, we expect domestic demand to restart, especially for flats and houses under £600k and covered within the Help to Buy scheme. Lower interest rates may help to boost this demand further. At the same time, we expect demand for luxury flats to pick up as well, as foreign buyers see opportunities with the weakened currency. Talk of referendums in other EU countries will further destabilise the common market and UK property will once again become a safe-haven, supported by strong property laws and plenty of further upside potential.
There are concerns that, without our ability to passport financial services into Europe, we will lose out to other financial centres and there will be an outflow of workers and a drop in housing requirements. It is worth considering however that no other financial centre in Europe is large enough to accommodate what we in London have built up, and this will not change overnight. While some controlled functions may need to be run within the EU umbrella, many support services can still be run outside the EU and there is therefore unlikely to be a rush for the exit. At the same time, while Europe is itself unstable, no financial firm will incur the costs of relocating only to find itself in the same position again. Most firms, we understand, have made provisions for only a small number of their overall staff to relocate over the next 2 years, but none are taking more drastic immediate action. Of course, if we manage to negotiate a passporting agreement then it all becomes a moot point.
In the long-run, the UK is still a global financial centre and will continue to be so because:
- English is the language of business globally;
- Central time zone; Test
- Flexibility in working practices making it easier to hire and fire staff;
- The sheer size of London is able to accommodate an entire industry;
- Availability of a skilled and multi-lingual workforce;
- People like living and working here; etc.
The fact that Brexit has affected global markets is further testament to the importance of the UK in global business and trade. The UK’s strength is emerging as a strength in other sectors, such as FinTech and bio-sciences. The government will support these and newer industries to ensure that the UK remains a global force in business and attracts the brightest talent from around the world. A mass outward migration of people is therefore unlikely, and the current housing shortage will continue.
There are several more benefits and risks that arise but, without going into every one of them in detail, it will suffice to say that for each risk there is another benefit. FX may work against us causing a rise in the cost of construction, but then the cost of development land would be expected to come down. Development funding may dry up as banks avoid lending in an uncertain market, but there has been a flood of alternative and stretched lenders that have entered the market keen to fill the void. Essentially, while Brexit will some problems and distractions, the long-term outlook for property will remain strong.
The future of Shojin Property Partners We cannot predict the future, but the most important thing, in our view, is to operate the business in a way that expose us to minimal uncertainty and volatility. To that end:
- Our projects are already well positioned to deal with market events in the coming weeks and months. Most of our loans are on fixed terms and fixed rates.
- We repositioned our business over 18 months ago to focus firmly on the domestic first time buyer market as well as the shared accommodation market . Both of these are very strong and stable markets.
- We plan to launch our first residential REIT (Real Estate Investment Trust) which will be able to buy the housing stock we create, while providing investors with a liquid, hassle-free way to invest in rental property. The rental market is expected to grow significantly as more people choose the flexibility of renting over buying.
- We are gearing up to take in ISA and pension money in all our investments, generating another stream of potential investors.
All in all, we expect our business to continue growing with plenty of opportunities among the uncertainty.
Over the next few weeks we will be running detailed analysis on all our projects and will stress test them for worst case scenarios to ensure there are no unknown or unprepared-for risks resulting from Brexit. We will send these notes out to investors in each project.
Conclusion While the result of the referendum brings a period of uncertainty, and will distract a lot of people from their day-to-day business, we expect the markets to stabilise within a few weeks. At that stage, the smart investors will be looking for the opportunities (of which there will be plenty). In the long-term we expect to be in a position not that dissimilar to the one we were in before the referendum, because it is highly likely that the deals negotiated with Europe will leave us in a similar position, at a similar cost, albeit without a seat in Brussels. In the meantime, property, along with gold, is a safe-haven investment for investors around the world, and the UK property market is amongst the favourites. Property in the UK will therefore continue to be supported in the long-term by both domestic and foreign demand, even if we do experience some bumps in the near term.