What does the ‘Leave’ vote mean for the London Property Market?
Friday, June 24, 2016 by Douglas & Gordon
Britain has voted to leave the European Union. After joining over 40 years ago, today’s result has delivered the most radical shake up in UK politics for a generation.
We believe that this result delivers opportunities in the London residential property market.
Our view is that short term market forces will be a strong buying signal for the UK residential market. By this autumn and throughout 2017, we forecast the UK will once again look like a ‘safe haven’ for overseas investors.
A united Conservative party will provide a bullish backdrop for UK real estate
During the past few months the uncertainty over today’s result has caused the London residential property market to slow down. Whether this uncertainty and weakness continues will come down to the Conservative government. Will they unite and govern, and how will they do that?
David Cameron has said he will remain in office until the Conservative party conference in October – this will allow time to elect a new leader to conduct negotiations with the EU over the UK’s exit.
The Governor of the Bank of England has reassured the markets that he “will not hesitate to take additional measures required” to support the financial markets through the “period of uncertainty and adjustment following this result”.
This could mean that the Bank of England will re-start Quantitative Easing (QE), and possibly lower interest rates to 0.25% from the current 0.5%
A new budget would ignite growth in the UK economy
- Our view is that the new look Conservative government this autumn may announce a revised budget that will be reflationary and about growth and uniting the Conservative party. This may well include some or all of the following: Cuts in corporation tax; cuts in CGT; cuts to the basic and top rates of tax; abolition of inheritance tax.
- There is an additional possibility that it may well, and importantly for London as a major financial center, stress that the City will not be bound by any EU regulations on a Financial Transfer Tax (and bonuses).
Medium term focus on UK ‘special status’ with the EU
- The overriding priority for the new look government this autumn and beyond will be to secure access to the single market and special status for the UK within the EU.
- We have been deluged with scare stories focusing on the perils of the ‘day after the night before’. This has mostly related to how European political leaders will react this referendum result.
- We believe EU leaders will need to resolve the UK’s status quickly and in a way that instils confidence back into sterling and UK assets. The last thing the French and Germans need is a weak sterling - adding to deflationary pressures in Euroland and taking export markets away from them.
-We think the UK will get a quick ‘special’ status, including full access to the single market.
The global backdrop will provide benefits for the UK residential property market
The great lesson of history is that the financial market ‘circus’ soon moves on to other distractions. The elections of 2016 and 2017 will provide plenty of opportunity for disruption in other countries.
- The US election in November looks set to undermine the whole basis of Global Free Trade orthodoxy. This will put doubt in the attitude of the USA, permitting unfettered access to its consumer market.
- Brexit will encourage electorates in Spain, France and Germany to vote for change in the EU. In particular, we believe that next year’s French Presidential elections will see the emergence of an anti-EU/Euro majority and this will have a seriously disruptive impact on Euroland.
- The political doubt that began twelve months before the general election of 2015, and continued ahead of this much anticipated referendum, has led to sterling weakening against the US$. Sterling has lost further ground against the US$ overnight - making UK residential property even cheaper for overseas investors.
- By the end of 2016 and through 2017 the UK and London will look like a “safe bet” for investors, and one that is 20% plus cheaper in US$ terms than it would have been a two years ago.
Potential policy changes to further encourage long term growth in the residential property market
- The key for long term investors, and a lesson that we all learnt in 2009, is that it is the policy response to any event that ultimately drives asset prices.
- UK residential property, particularly at the top end of the market, has faced sustained headwinds over the last two years: Higher bands of SDLT; the impending reduction of mortgage interest relief for 40% buy-to-let tax payers; the additional 3% SDLT levied on buyers of second properties.
- Our view is that the new look government should abolish the top rates of SDLT in order to encourage overseas investors back into the UK residential property market. This, combined with the new level of sterling, will be a further boost to the Prime Central London property market.
- We have consistently argued that the major threat facing the global economies is one of deflation. Whilst we have been preoccupied with the referendum, global uncertainty has meant that bond yields in Germany have turned negative and gilt yields in the UK have slipped.
- Today’s statement from the Governor of the Bank of England, that he will use all the tools at his disposal (possibly cutting interest rates/QE) to avert a recession caused by this current uncertainty, strengthens our case.
- The implication of this is that interest rates in the UK will continue to remain low for longer, underpinning the residential property market.
-In this deflationary climate, the yields on offer from residential property in certain parts of London will become increasingly attractive to investors. Indeed, if Europe kicks off, which may well be the case, a strong and independent UK might be the only place to invest.
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