UK INVESTMENT
Brexit
The effect on the London buy-to-let market? BY JAMES GLEW
It has been less than a month since Britain’ s surprise decision to leave the E. U., and what a roller-coaster ride it has been. Make no mistake; this is just the start of a story that will take many years to unfold. The new British Prime Minister, Theresa May has said she will not invoke Article 50 of the E. U. Treaty, which starts a twoyear process of withdrawal, until 2017. The outgoing Foreign Secretary Philip Hammond warned that it could take up to six years to complete the departure from the E. U.
In a nutshell, I believe that in the short term, uncertainty is likely to discourage some domestic buyers while the weaker pound and low interest rates will encourage more foreign buy-to-let buyers to enter the market. In the long term, the outlook for the housing market will be determined by economic fundamentals.
As Brexit is only just starting to take effect, my view on the outlook for London buy-to lets will undoubtedly evolve as concrete changes are made. I believe the Brexit factors that will shape the UK housing market fall into three main areas- POLITICAL, ECONOMIC and FINANCIAL. I will continue to track developments in these areas with interest.
Here are some of the major factors that have shaped things so far:
UK’ s new relationship with Europe and the rest of the world: Official trade statistics show that the European Union is the destination for about half of all British goods exports. The trading links are bigger if we include the countries that the United Kingdom trades freely with because they have a free trade agreement with the European Union. These agreements mean that 63 % of Britain’ s goods exports are linked to European Union membership.
Brexit will give Britain a crucial opportunity by allowing it to broker its own trade deals with non-
European Union countries. Non-European Union countries may find negotiating with Britain easier and quicker than dealing with the European Union.
Pound devaluation: The immediate devaluation of Sterling against the US Dollar by about 8 % versus pre-Brexit levels, has created a significant interest amongst foreign buyers, looking to capitalise in this period of uncertainty. One large London agency has informed me that enquires from foreign buy-to-let investors have increased by 50 % post Brexit period.
If the pound stays low for some time to come, there is the prospect of inflation coming through, and this is turn will squeeze household finances, constrain domestic buyer demand but simultaneously causing a rise in rental demand, thereby increasing buy-to-let yields.
Interest rates to remain low for some time: Low interest rates reduce the cost of mortgages and therefore stimulate buyer demand.
The Bank of England( BoE) surprised markets in July by freezing interest rates. However, the BoE’ s minutes of meeting pointed towards a likely August rate cut. This was all-but-confirmed subsequently, when BoE official Andy Haldane called for near-term monetary easing and sent the Pound on a brief drop against peers.
Indications are that the Brexit result will keep interest rates lower for longer, thus underpinning house prices.
For more info contact: James Glew CA( SA): Inventure Properties James @ inventureprop. com
RESOURCES
Inventure Property
56 AUGUST 2016 SA Real Estate Investor www. reimag. co. za