Brexit not seen affecting stability of UK property market
Britain has always been a top destination of cross-border capital, predominantly the office and high-end residential properties in London. These properties in particular have attracted a high level of interest from the Middle East, Eastern Europe and Asia-Pacific (primarily mainland China and Hong Kong).
Generally speaking, I believe a mature, stable property market, a well-developed, transparent law system, and advanced financial services have all contributed to the privilege and charm of the British market.
Chinese investors have shown strong interest in recent years, which has much to do with the depreciation of the renminbi combined with rising house prices.
As the Chinese pursue opportunities in overseas markets, Britain appears a favourable market given the language advantages as well as all the benefits from the “golden decade” of the China-UK relationship.
Before the referendum
The impending referendum on whether Britain should remain in the European Union will undoubtedly cast uncertainties over the stable British property market, which is unlikely to persist, resulting from investors’ concerns over Brexit’s impact on the financial sector.
For instance, the British pound could fall by 10 per cent to 25 per cent in case of a British exit. Nevertheless, the market looks promising in the long term, although players are expected to be sidelined over the short term.
The first quarter of 2016 saw a decline in transaction volumes of residential space amid high-level prices and scarce supply in core areas, combined with strict mortgage rules and pre-referendum uncertainties.
However, residential prices are expected to remain largely stable throughout the year.
During the same period the office market presented a mixed picture, as the leasing sector showed continued strength while sales declined due to limited core supply. Prices saw little change and the potential impacts of the Brexit referendum saw investors adopting a wait and see approach.
After the referendum
●A retained EU membership would lead to further market recovery
Should Britain keep its EU membership, its property market would have a very busy second half. Those who decided to wait for the referendum results would then accelerate their investment, which in turn would lead to a significant rebound in transaction volumes.
●An exit would keep investors sidelined for another one to two years
In the case of a British exit, I expect to see investors stay out of the market for one to two or even more years. We can call this a transition period, when detailed negotiations with the rest of the union will take place.
●Short-term – market volatility
The depreciation of the pound would possibly be the most notable change in the short term, consequently exerting downward pressure on property prices, especially in the residential sector. The impact on the office sector would be rather constrained. The value of office assets is reflected in rental incomes, while a typical lease spanning 10 to 15 years will protect your investments from short-term market movements.
●Long-term – established dominance
From a long-term perspective, Britain’s development will largely depend on its economic strength, stage of market cycle and supply-demand relations – exit or not. Personally, I see no reason to be pessimistic.
At present, London and Frankfurt remain the top two financial cities in the European Union. London’s position as one of the world’s financial centres was not built in a day, and the pound remains one of the world’s most important currencies, independent from the euro.
I would not expect such dominance and strength to be undermined by Britain’s exit from the EU.
Albert Lau is chief executive of Savills China