The historic decision to leave the EU has, as expected, sparked the beginning of a period of exceptional volatility across the world’s financial markets, while sterling sank to a 30 year low against the dollar overnight on 23 June.
Britain is this week waking up to a new dawn, ushering in a period of uncertainty that will take hold while the government formalises its strategy to manage the complications surrounding a separation from the EU. Indeed the Prime Minister’s resignation will add to the ambiguity in the coming months.
Clearly there is a lack of leadership at present, but with the referendum results behind us, we hope to see some clarity in the coming months on the UK’s new EU relationship.
Impact on property
The property market has been stifled by the uncertainty in the lead up to last week’s historic in-out referendum and we have seen investment volumes fall ever since the referendum was announced. In fact, UK commercial property investments since January are down some 39% on the same period last year. Furthermore, sterling has lost significant ground to major global currencies over the past six months.
For those invested in the property market, the deterioration in the value of sterling at the end of last week would have erased any gains in recent years, particularly buyers from the Gulf, whose currencies retain a fixed peg to the US dollar. In fact, any US dollar or UAE dirham investors will have found the price of an average prime Central London residential asset worth USD 96,000 or AED 350,000 less than it was on June 20 (or 3.4% down on the average price of a prime Central London residential property).
A silver lining?
Conversely of course, London residential property would now be USD 96,000 cheaper for international buyers looking to enter the market.
A silver lining would be the fact that those eyeing up a London residential asset, particularly those purchasing in US dollars, such as buyers from the Gulf, would find it about a third 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. This would mirror the results of our recent Middle East Private Capital Survey, in which London was named as the most likely property investment target for HNWIs from the Gulf during 2016.
Furthermore, as is customary during any turbulent economic periods, global investors seek out safe haven assets such as gold, which began appreciating in value rapidly at the start of this year when the economic wobbles in China began to weigh on global markets. London’s bricks and mortar has historically been perceived as a safe haven asset class and we expect it to retain its appeal, particularly amongst the international investment cohort who are now able to take advantage of significant currency-linked discounts.
Long term outlook
The longer term implications are too early to assess, but we may start to see a change in London’s long stalled residential property market, with investors both exiting and entering the market as we progress through a period of demand volatility. This has the potential to free up much needed stock in the capital and allow the resumption of more regular levels of transactional activity. Asset values of course, are likely to come off their current peaks should supply levels suddenly and dramatically rise.
Just how much of a correction there is in the market, if any, is still too early to assess. We will be investigating this and other key issues during our next market forecasting round over the summer, including the ability of house builders to meet current housing demand in light of the sharp fall in some of their share prices and the risk of finance and banking jobs moving out of London, particularly as the sector remains a key source of demand in both the residential and commercial markets.
Faisal Durrani is the Head of research at Cluttons