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Recently the Financial Times made headlines with the declaration that London’s Prime property market was picking up despite Brexit uncertainty...
In an article of October 8th the FT reported “increased interest from buyers who had put off a purchase in the wake of the referendum”, which if you’ve been reading the papers or watching the nightly news recently does sound surprisingly upbeat. Jemimah, does this fit with what you’re seeing on the ground?
Jemimah: It does, yes. The FT spoke to a number of property pros including some who work on behalf of buyers (as I do). We all seem to be observing the same thing: this whole Brexit saga has dragged on for such a long period that many are just fed up with waiting, and unwilling to postpone major life plans any further. Activity levels (and prices) were quite subdued in the run up to March 29th of this year (the prior planned exit date). As we blew through that March exit date and saw Parliament legislate to delay again, that’s the point at which things turned a corner. Activity started to pick back up, particularly on the buy-side of the market, as purchasers chose to resume their searches. The weakness in the British Pound has also encouraged dollar-holding purchasers to step forward and capitalise on the significant value bump that’s been created by all the Brexit uncertainty. I think Neil will probably want to jump in at this point...
With a chiefly American audience many of our readers have been watching Sterling’s post 2016 slide with interest. Neil, has your team seen evidence that this rate shift is converting into greater inward investment from those countries enjoying some extra purchasing power?
Neil: Absolutely yes, we’ve seen a major shift in the demographic of our client base since 2016. Pre-Brexit 80% of our clients were UK based clients purchasing property overseas, with the majority of those buying in Europe. Sterling weakness, coupled with growing uncertainty regarding how Brexit will affect UK clients’ pensions & healthcare benefits [when living in Europe] has seen those clients pull back and adopt a far more cautious approach. The currency impact of Brexit thus far has been a weakening of Sterling to the tune of 20-25% against the US Dollar, and it’s traded close to some of the lowest levels in 35 years. The Dollar is also trading close to some of it’s strongest levels in the last 15 years against the Euro, which has created a real opportunity for US clients looking to buy property or make sizeable investments all across mainland Europe. For some perspective on just how big an impact this has made: pre-Brexit as little as 5% of our clients were from the US at any one time; over the last 6 months almost 50% of our clients are based in the USA. Huge jump! It is not hard to see why when you take a closer look at the numbers... A US client buying a £1,000,000 property in London pre 2016 would have needed to convert over $1,500,000. Over the last few weeks the same £1,000,000 property would cost between $1,200,000 - $1,280,000, the current value being offered by the exchange rate is clearly too good for US clients to ignore, and they’re bullish enough on the UK’s mid to long term prospects to buy in now despite any of the present Brexit-related uncertainty.
And are you anticipating that Sterling’s weakness will continue into 2020, and how would you advise readers wanting to move funds into the UK in coming months?
Neil: There are many potential answers to this and it’s definitely the $64,000 question at the moment, but in my view the state of the pound hugely hinges on whether a deal is struck between the UK and European Union. There are two likely scenarios for 2020, and the first of those would see the UK leave the European Union without any form of deal. That will undoubtedly put pressure on Sterling and it would likely suffer in the short term, losing further value. Alternatively if the UK can reach an agreement with the rest of Europe there will be less uncertainty for the UK economy, and this alone would help Sterling to recover at a much quicker pace. A rise in value of Sterling would be extremely likely - I would expect to see an initial burst on the relief of an agreed deal, followed by a gradual move higher as the economy stabilises. Talking in numbers we’re likely to see Sterling drop back below 1.20 very quickly on a no deal Brexit outcome, compared to seeing it progress up into the mid 1.30’s very quickly if a deal can be agreed and passed through Parliament.
Circling back to the Brits favourite obsession, house prices, is it just activity that has jumped since Q1 or are prices rising also?
Jemimah: Great question. The prolonged uncertainty of a slow motion Brexit has generated some awkward effects including the activity bottleneck, and the consequent bounceback as many got tired of waiting on the sidelines. But buyers have been quicker to return to the market than sellers. This makes sense: buyers can capitalise on uncertainty and drive favourable negotiations; sellers are fearful of this and so will try to wait out the uncertainty (if they can). This has put a squeeze on inventory that feeds through to closing prices, a phenomenon particularly apparent in lower price bands (which are more competitive). Inventory is presently tight with stock falling broadly into three visible categories: Category 1 is overpriced stock that’s been sitting for a long time, held by sellers unwilling to adjust the price; dead stock. Category 2 is well presented and keenly priced stock; this section of the market is moving well, and in trendy neighbourhoods we are already seeing a return to multiple bid/sealed bid scenarios. The seller’s reward for listing at an attractive price is to generate levels of interest that can push up the closing price. Category 3 is one where I see some real opportunity - stock that is priced fairly sensibly but requires significant works. Fewer households are willing or able to take on significant works projects at present. Many are stretching their cash resources just to cover the mortgage downpayment and stamp duty tax, leaving insufficient cash left over to embark on major renovations. For purchasers willing and able to take on such works there are some really great deals on offer at the moment; the stock exceeds the number of viable purchasers in that particular market category giving purchasers greater leverage in negotiation.
Now we know it’s unkind to ask you ‘crystal ball’ questions - especially with this issue going to print right before the Brexit deadline! - but what can you both tell us about where things might be headed in 2020?
Jemimah: On the property side I would expect inventory to loosen as we emerge from under the cloud of uncertainty that has been shrouding us for the past 3 years. Sellers will return to the market in greater numbers and that new stock will in turn attract fresh interest from local buyers who’ve been watching and waiting. With an election now expected by most, perhaps even before end of year, a major wildcard will be who forms the next government and what those policies will look like. If Boris Johnson is returned with a majority that would be viewed as positive for the property market. He has also made noises about his dislike of stamp duty taxes in general, particularly at present levels. A significant reduction in rates of stamp duty would have a big effect on market volumes, as moving would become more affordable for locals wishing to upsize/downsize who have been trapped by the punitive cost of doing so. I’ll leave Neil to comment on what might happen with Sterling but I would expect continued inward investment from dollar buyers while the Pound stays weak, and a boost to inward investment overall if the government is able to communicate to the public a greater degree of general competence than we have been stuck with for the past few years!
Neil: That is very much a ‘crystal ball’ question, and for my own safety I can only restate that it’s heavily dependent on the outcome of Brexit! Personally I’d be looking at the longer term view when it comes to where things will end up for the UK economy and currency. The reason I say this is that no matter what the outcome of Brexit volatility will follow almost any scenario, but it is inevitable that the UK - being the world’s 5th largest economy - will bounce back. New trade agreements will be struck, and the rest of the world will all want to capture some of the UK’s business whilst they have a window to do so. As the uncertainty surrounding the UK economy recedes, no matter which Brexit scenario plays out we are likely to see Sterling rebound with time. Historically GBP/USD trades more naturally between rates of 1.50-1.75 and over the next few years we are likely to see reversion to that more natural level. US investors adopting a mid to long term strategy should see this as a great opportunity to secure an exchange rate at a favourable level, perhaps the last wide open goal for a good few years to come. If the rate does return to 1.50-1.75 in the next 5-10 years the currency aspect of your investment can work as a natural hedge against any negative fluctuations in property prices. Converting funds from USD to GBP at the current levels there is potential to gain 20%-40% on the currency conversion, if the market does indeed return to 1.50-1.75. Say you needed to sell your investment property at a 10% discount to the original purchase price, but you were to gain 20%+ on the currency conversion, your investment would still be extremely profitable. When you take this into consideration it’s less surprising that inbound business has shifted so strongly in favour of US clients, they’ve run the numbers and made decisions accordingly!
Jemimah Barnett is a property buyer’s agent based in London. Visit her website www.jemimahbarnett.com to find out more about her services, and browse her advice articles for prospective purchasers.
Neil Poyton is a Director of Spartan FX, currency brokers and advisors to US expats moving funds into the UK and Europe. Contact Neil and the Spartan team via firstname.lastname@example.org | www.spartancurrency.com.