Well, we created history last week by being the first country to vote to leave the European Union. It was a shock, even to the bookies...the bookies were of course wrong. It is THE dominant subject right now, whether that be in the news, on social media or in pretty much any conversation taking place inside and even outside the UK. But, let’s not make this a political podcast…let’s instead try and focus on the implications to us as property investors in this week’s show.
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Transcription of the show
Hello and welcome to another edition of The Property Voice Podcast, my name is Richard Brown and as always it is a pleasure to have you join me again on the show today.
Well, we created history last week by being the first country to vote to leave the European Union. It was a shock, even to the bookies! When I checked the betting odds before going to bed on Thursday, Remain was 1-6 with the bookies…usually a better predictor than opinion polls. The bookies were, of course, wrong.
It is THE dominant subject right now, whether that be in the news, on social media or in pretty much any conversation taking place inside and even outside the UK.
The Leavers seem equally as shocked as the Remainers, but let’s not make this a political podcast…let’s instead try and focus on the implications on us property investors in this week’s show.
Property Chatter
Well then, what on earth happened last Thursday and Friday? We actually voted to leave the EU and despite some opinion polls suggesting that it may happen, the bookmakers seemed very confident that we would remain in the EU. Therefore, I went to bed on Thursday night fully expecting a remain vote and business pretty much as usual. I thought wrong and I think a lot of other people thought wrong as well.
In preparing for today’s show, I recall my parting words from last week prior to the vote, which were:
No matter which way we vote as a nation on 23rd June, there will always be opportunities for the smart, well-informed and agile property investor…so, look for the upside and the benefits, whichever way it goes…
So, today is not going to be a political discussion about the rights and wrongs of the referendum, or how we can come up with ingenious ways to force through our personal political agenda. Instead, I wanted to get right down to business…property investment in a post-Brexit vote landscape.
I have been looking for some indicators from other people in the industry and in the investment community as to what they think may happen…I have my own views, of course, but let us start with a few quotes from some people working in the industry.
Charlie Ellingworth, from Property Vision says “The most likely scenario is one that we have seen before in other times of dislocation—1987, 1998 and 2008—a period where the market seizes up and the only activity is between the brave and the desperate,” Better be on the brave side of the deal than the desperate one then!
Lucien Cook, head of residential research for Savills, says “it is impossible to predict what will happen until the wider economic effects of Brexit materialise…uncertainty among buyers will continue, restraining price growth and transactions in the short term.” So uncertainty means less people in the market and fewer transactions to pick from.
Richard Donnell, director at analyst Hometrack, predicts a fall in housing turnover and slowing price growth as buyers wait and see how the exit plays out. Note that the falls that he refers to here are in volumes and house price increases, not necessarily a price drop in itself.
Jan Crosby, head of housing at KPMG UK, predicted transaction volumes would decrease and “stay deflated for some time – perhaps until next spring. The impact on prices would depend on the house builders’ reaction, but it was likely there would be a price drop of around 5% in the regions, possibly slightly more in London. However, he added: “We are most likely to see a drop in the growth in asking prices rather than pricing, which will likely change less.” Again then, the sentiment is around reduced volumes more than pricing it would suggest.
Peter Wetherell, who runs an estate agency in Mayfair, said the decision to leave could lead to a Brexit bubble in some parts of the London property market. “This morning already sterling has plummeted to a low not seen since 1985 and this will now create a short-term buying opportunity for US dollar- and euro-based property investors. This is a market for risk-takers and people able to spot high-risk but potentially lucrative opportunities that have emerged overnight due to the fluxes in the markets.” Despite the effect of the Brexit vote, London still has appeal as a safe haven for asset accumulation and wealth storage…especially when currency falls make it even more affordable to get in!
James Evans, chief executive of Douglas & Gordon, said a vote to leave would mean “an exciting buyers’ market”. He said: “If there was a fall in appetite it would be filled very quickly by people who are sitting on a lot of cash and not getting a return anywhere else. These would be domestic buyers with cash or foreign buyers who are also getting an extra bonus because of the currency.” Cash is king again, it seems…
Meanwhile, in a rather contrasting view, perhaps also somewhat loaded as it was made pre-referendum, Zoopla, the property website, claimed that average house prices of just over £297,000 might fall by around 18% due to the combined effects of uncertainty, increased unemployment, reduced investment and higher borrowing costs. Altogether, an out vote could slash £1.5trillion off the total value of the UK’s housing stock, they claimed. That’s the grimmest warning that I saw, although as said this was made pre-vote, so the motives are a little unclear. Equally, it also ignores any corrective action that the Government may take. Personally, I believe interest rates will be cut, however, bank lending rates and statutory interest rates may not always track as closely as they have more recently. The EU negotiations will help to determine the potential impact on employment and investment, long-term it may actually be good for the UK, but I think everyone pretty much agrees that short-term there may be a shrinkage in economic growth.
Mark Hayward, managing director of the National Association of Estate Agents, says it expects prices and rents to remain stable in the short term. I am not sure I would go as far as to say stable, however, the fundamentals of undersupply and strong demand will remain in place for quite some time yet I expect.
Grainne Gilmore, of Knight Frank, says: ‘In the short to medium term, the fundamental demand and supply dynamics are unlikely to change with a continued undersupply of homes across the country underpinning pricing in some of the most desirable areas.’ Yep, that pretty much sums up my conclusion as well.
In summary then, nobody really knows for sure, but a couple of clear points appear to be consistent:
- Uncertainty will bring with it reduced transaction volumes
- Many non-essential buyers, be they homeowners or investors, will sit tight for a while
- Essential buyers and sellers may well carry on now that the outcome of the vote is known
- The drop in the value of Sterling will attract overseas buyers
- The biggest pricing impact is likely to be felt in London, although the value of Sterling could yet prop it up. Other regions may well be OK, or only mildly affected it is predicted
- The fundamentals of the UK housing and rental market are sound and will probably lead to a cooling in growth, but a more or less steady period or rents and prices…eventually…once we get past this void in leadership
- Longer-term, the implications of a withdrawal from the EU are yet to be fully determined and so we need to wait and see on that
Whether we will invoke Article 50, sooner, later or not at all is still a question to be fully answered. So, as professional property investors, what should be our position?
My response - be optimistic and look for the opportunities.
Let's get ourselves ready then...being ready means adopting a twin-fold approach of protecting the downside, whilst maximising the upside.
If we start by protecting the downside, this means taking the following steps:
- Reviewing our existing portfolio to understand the situation for each property relative to rent levels and demand, current values and equity position, current borrowing levels and terms
- Identifying individual properties to protect, refocus or shed in the months ahead
- Protection will come by locking in long-term fixed rate mortgages, ensuring that our property is attractive to rent and that our rent level is around the 90% of the market level if possible, to both maximise returns and minimise voids
- If we decide to refocus a property, this may mean converting it from one use, such as a single let, to another one, such as a multi-let or a holiday let instead. Higher rental yields are a great way to hedge and ride out the storm.
- If we decide to shed a property, we should do the sums in terms of mortgage settlement, including any early redemption penalties and also any tax implications. I would imagine that now would not be an ideal time to be disposing of a property, however, so this could be the least attractive option therefore.
Turning instead to opportunities, let’s see how they may present themselves. Here are some ways I can imagine:
- Reduced buyers and lower transaction levels as average Joe Public and Ann the Amateur Investor sits it out mean less competition when it comes to acquisition
- More motivated sellers as some panic and try to escape sooner than later means more opportunities to negotiate discounts
- Undervalued assets becoming available to buy, particularly when the inherent rental yields bear up means a time to be contrarian and lock in longer-term inherent asset value now
- Relatively unchanged national fundamentals in the housing market underpinning demand for housing (both to buy and to rent) with a structural a shortage of supply means a bright outlook for the rental market and longer-term for house values too
- Some short-term micro market price falls, such as London means knowing where to look and where to avoid
- Opportunities to acquire property using creative contract and financing techniques, such as vendor finance and options mean being open and ready for alternative types of opportunity, just as there were post the last housing crash
No matter what happens in the political world and the economy, you can always tune into this podcast for a weekly fillip of good old property insights. If you fancy a more light-hearted assessment of the way forward then just look up #weneedaplan on Facebook or Twitter and find Dom Beaven’s post…it’s brilliant really in a kind of pull yourselves together sort of way J
However, I will perhaps leave you with this quotation, which has been in my mind since last Friday and indeed was the inspiration for my regular Motivation Monday piece as well as the podcast for this week…
“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”
Winston S. Churchill
And on that, slightly more upbeat note, let’s draw a line under the whole political discussion for now and be property investment optimists shall we?
Thank you very much for joining me on the show today and until next time on The Property Voice Podcast…it’s ciao ciao!