When the United Kingdom voted to leave the European Union the move made waves not only in Britain but also across the globe. Here we discuss its possible effects.
By Paul Ho
A union that was established out of a desire to have peace among countries in a divided, and war-torn continent, the European Union (EU) is a politico-economic confluence of 28 member states with a total population of more than 500 million.
Through the EU, a single, large market where the flow of goods and services became easier via a tax-free trade was created benefiting all members—including the United Kingdom (UK).
However, on 23 June 2016, the UK shocked the world with the result of its referendum—a vote in which everyone of voting age can take part—where 52 percent of the votes favoured to leave the union.
But what does the vote to leave the EU mean to properties in the UK and those looking to get a piece of the market? Here are some points to note:
On properties in the UK and on local buyers
Because of the Leave vote, it is expected that banks in the UK are expected to impose stricter rules in loan. While the uncertainty lingers, this is expected to affect lending activity, and willingness of banks to take risk is also expected to decline.
Banks in the UK, in general, may start to reduce the loan-to-value lending limit which will have an adverse impact on transactions and property prices. This may, therefore, lead to requiring property buyers to fork out more for down payments.
Despite this, Brexit’s impact on UK property investments are not expected to have a massive effect on UK residents seeking to secure loans as banks there are unlikely to completely stop lending especially with the Gross Debt Servicing Ratio (GDSR) remaining in place.
UK-based property developers wuth having most of their assets in GBP (pounds) and developing properties for UK buyers are also likely to experience only minimal impact, except for some restrictions and tightened lending in the short-term.
On foreign developers, buyers
Foreign property developers in the UK developing properties for the UK residents will likely face short-term currency exchange losses due to the pound’s depreciation in the near term if they report their earnings in a currency other than the GBP.
Property developers will be faced with increased cost of construction at the bottom line and restriction of pricing power at the top line due to less leverage from banks.
As local UK banks may restrict or reduce lending to non-UK residents, lower-price quantum units may see less impact.
Without access to leverage, a segment of borrowers that typically need financing for their investments will dry up. This may pave the way to cash-rich foreign investors eyeing UK properties to enter the market.
These buyers will then allow property developers building those “best-in-class” properties in the most prime and sought-after districts to still be able to move their assets if they are willing to negotiate.
On the overall property market
The depreciation of the pound presents buying opportunities in good locations. However, any such buyer will need to be more financially liquid and be prepared to hold on to the property for a longer period of time. The cost of financing a property purchase in the UK may also increase as the London Interbank Offered Rate (LIBOR) may rise in response to possible speculative attacks on the GBP to combat capital outflow.
Overall, London may still be an attractive destination for investments, particularly for foreign direct investments as they may now see cheaper lower property prices. There is also the possibility of lower real estate rentals, lower industrial and commercial property prices, lower staffing costs and relocation costs for corporations looking to send their personnel to the UK.
Beyond property
The UK is an economy robust enough to leave the EU. In reality, the EU seems to have become a trade bloc where regulations are very hard to understand. The UK, on the other hand, is a top choice for foreign direct investments. By leaving the EU, the budget deficit will improve from 4.5 percent to 3.5 percent.
While capital inflows may slow down due to uncertainty around the EU exit, funds may still choose to remain in the UK. As the UK pound has weakened, exporters are given greater international competitiveness.
On the other hand, LIBOR may rise at times to combat potential funds outflow. If the markets attack the pound again, the LIBOR may rise to cushion the impact. This will, in turn, affect financial products pegged to the LIBOR.
Finally, we will likely see the UK moving toward the east again, as it had done in the past.
However, as the exit negotiations have yet to start, it is hard to predict the outcome. We can definitely expect a few surprises and some volatility.
Paul Ho is the founder of www.iCompareLoan.com