Property mogul, Ofir Eyal Bar has been a power player in the UK market, with a substantial portfolio of investments across the board. One of the most pressing questions he receives at his seminars with budding investors is the following: How will Brexit impact real estate investments? As a self-made millionaire, he has racked up considerable experience with commercial real estate, residential real estate, raw land, and mines. The Brexit saga is particularly poignant, since it has far-reaching implications for the broader UK economy, and the world at large. When Britons voted on June 23, 2016 to leave the European Union, scant attention was focused on the deeper implications of a Brexit on real estate investments. As a case in point, consider the GBP/USD exchange rate prior to Brexit, and the current exchange rate.
- June 23, 2016 – 1 GBP was the equivalent of 1.4883 USD
- August 6, 2019 – 1 GBP is the equivalent of 1.21805 USD
Barring asset appreciation, inflation, or other factors, the nominal value of a £1 million property on June 23, 2016 was the equivalent of $1,488,300. Fast forward three years, that same £1 million property is worth $1,218,050 on August 6, 2019. That is a net decline of $270,250, or 18.16%. This rudimentary example serves to highlight the impact of speculative sentiment on property prices, given an imminent Brexit. Of course, the Brexit hasn’t occurred yet. Prime Minister Boris Johnson is expecting Britain’s divorce from the European Union to take place by October 31, 2019. What happens on November 1, 2019 is anyone’s guess.
Why Is Brexit Associated with Massive Uncertainty?
For starters, a divorce agreement between the United Kingdom and the European Union is unprecedented. The region is built on deep commercial, political, ideological, cultural, and social bonds, many of which will be tested with a Brexit. The shock factor alone is enough to send markets into a tailspin, and the pound may not be able to sustain crashing negative sentiment. The global economy reacts strongly to what happens in the EU and the UK.
Many of the world’s most valuable courses are based there, including the FTSE 100 index, the FTSE 250 index, the CAC 40, the DAX 30, among others. Given that the global economy is a synergistic, integrated sum of its parts, a shock wave that initiates in Europe and the United Kingdom will spread far and wide. As a result, we can expect the monetary authorities (the Bank of England and the European Central Bank) to maintain a prolonged period of low interest rates to support the economic shocks that follow.
Naturally, a slow pace of economic growth will have a devastating impact on commercial real estate. This is particularly true of the retail sector, and office buildings, both industrial and commercial. Since nobody knows what the precise details of a Brexit will be – Hard Brexit or Soft Brexit – the impact of the divorce settlement could range from severe to moderate, but it will impact property prices nonetheless. As a result, the uncertainty in Europe and the UK could send a deluge of funds to the US and other markets.
This capital flight from UK and EU investors could serve to undermine the value of properties in the UK and the EU, and boost demand and prices for US-based properties. As property prices in the United States rise, so the cap rates will fall. Unfortunately, the Brexit saga belies a much deeper crisis which has been brewing in the EU for many years. That being anemic growth, high levels of unemployment, and an atmosphere that can best be described as low confidence. The global financial crisis threw Europe for a loop, and it has not recovered in the years since. The Brexit may be the final nail in the coffin.
Cross currency exchange rates will be impacted by Brexit-related phenomena. Property markets in other parts of the world will react accordingly. For example, destinations outside of Europe such as Israel, South Africa, the United States, Australia, and New Zealand may be seen as viable alternatives. As money exits the EU and the UK at an accelerated pace, it will also serve to devalue the purchasing power of the euro and the pound. As traders and investors sell EUR and GBP, they will be buying alternative currencies like USD and JPY.
This also impacts economic growth prospects which directly spill over into the real estate market. If the purchasing power of the GBP gets eroded too much, people in the UK will struggle to make purchases. This may cause the housing market to contract, curtailing the construction of new properties and boosting demand for rental properties. Real estate tends to act in accordance with what’s available, with excess supply leading to lower prices, and reduced supply leading to higher prices. Either way, the rental market looks likely to benefit from a depreciating pound and a reduced number of housing starts.
Prognostications for the Real Estate Market
The most damaging effects of a Brexit will be felt in the City of London which has heretofore been known as the biggest concentration of financial and banking corporations outside of the United States. The London Metropolis has served many European nations as the epicentre of European trade. No other city in Europe has been able to compete with London for decades. Markets could suffer losses of 25% – 30%, with a fractious relationship between the UK and the EU. The absence of trade agreements, and a common market, customs free, duty free, and tariff free activity could prove damaging to London’s economic prosperity.
Rental prices will plummet, vacancies will increase, and closures of real estate will be the norm. This will continue unabated until such time as the UK and the EU can patch up their differences and come to equitable agreements. Nonetheless, the City of London has widespread appeal that transcends beyond Brexit-related matters. One area of growth will be UK warehouses in and around the City of London. This is particularly true with a Hard Brexit. Storage facilities will be needed, for speculative purposes. Unfortunately, no one knows precisely what the long-term prognosis of the real estate market will be, given the multifaceted intricacies we are dealing with.
One thing is likely: a Brexit is a guarantee of uncertainty. When people are scared about what’s going to happen, they are generally reluctant to spend money on big-ticket purchases. Real estate will suffer as a result. In January 2019, UK house price growth ticked over at its slowest pace in approximately 6 years, at just 0.1%. Expectations remain largely bearish, given the fears that a Brexit strikes into the hearts of investors.
Most people are playing a waiting game, hoping for the best, but planning for the worst. Since the Brexit referendum in 2016, UK home sales have effectively plateaued out, and the steady growth between 2009 and 2016 is over. As interest rates tick lower, banks will attempt to entice new homeowners into the market. Of course, Prime Minister Boris Johnson may just surprise everyone and wrench the UK out of the fire. Sage advice at this stage is to wait it out before investing in real estate at home, or abroad.