Date Published 20 June 2016
In the wake of the upcoming EU Referendum, which is only a couple days away – taking place on the 23rd of June, many current Marylebone landlords, as well as potential investors looking to add to or enter the Marylebone investment scene, have been engaged in constant conversation regarding the potential effects on the property market, should Britain decide to leave the EU. As well as frequently coming across newspapers outlining the possible changes that could take place in the property market should Britain vote towards the all too familiar term of a potential ‘Brexit', quite a number of my readers have in varying degrees mentioned and voiced out their concerns towards this very realistic outcome. One such reader, an investment banker working in Central London, who has purchased a series of Marylebone properties over the last couple of years, sought some advice concerning the potential effects a potential ‘Brexit' vote could bring about towards his string of investments. He enquired whether I thought that his properties would remain unaltered in their investment prospects, or if in my opinion he would be better off selling his properties sooner rather than later?! First of all, I advised him to remain level-headed and sit tight for the time being, for whether we leave the EU or not Central London properties, especially in Marylebone, will still be a great investment choice even if the investment potential decreases or is halted slightly – these things are simply beyond our control. I told him that I would undertake some extensive research, and in this article I will be expressing a range of opinions from well-positioned individuals, as well as outlining some common concerns about Britain leaving the EU, whilst also talking about how similar occasions have affected the property market in the past.
Firstly, I would like to express that the most important thing investors and landlords alike can do is to not panic in the run up to the vote, the ‘in' campaign will undoubtedly be trying to scare us with forecasts of negative equity and unhealthy investment prospects. Nevertheless, these speeches are essentially predictions only, and based on speculative thinking – Britain has never left the EU before so we simply cannot know for certain, how the state of our finances and investment ideals will be in a post-Brexit, should this end up occurring. Each voter will have their own motives for deciding to either leave or remain, successful individuals fear change and a reduction of their investment incomes, whereas promoters for Britain to leave will probably appeal more to the younger generation, those seeking a change from their bleak current outlooks, or perhaps a vote could be motivated purely for nationalist and patriotic purposes - simply desiring that Britain regains its autonomy from Brussels and become its own independent law-maker once more. The ‘out' campaign will largely consist of individuals who have been priced out of the current property market, those who desire a new era of less expensive housing, and essentially from those seeking more local investments along with an increase in skilled jobs for British workers. Nonetheless, those leaning towards an ‘in' vote should calmly bear in mind that although many London estate agents as well as developers fear a reduction in foreign investment, we should reasonably consider that overseas investors will still find Central London areas such as Marylebone attractive. The reasons behind this feeling is because foreign investment in London is often motivated by the sway of political and economic steadiness, a well-structured and fair legal system, along with the traditional/culturally-lively London experience – all of this remains whether we stay in the EU or not.
Much of the concern with a potential parting from the EU revolves around uncertainty, and often in the run-up to upcoming elections (or important referendums), big decisions are often put on hold and investment opportunities are more sporadic; people are less likely to part with a lot of money in lucrative areas such as property investment, when they cannot clearly predict investment outcomes. The accountants/advisory service of KPMG have recently undertaken a poll of 25 global real estate investors with assets under management of over $400 bn and the results show that two thirds of the involved populous believe that a potential ‘Brexit' would result in less inward investment into the UK and particularly property companies. The fears predominantly lie with this idea of uncertainty, where as Andy Pyle head of real estate for KPMG states: ‘In times of uncertainty, it's easier to sit tight'. The consensus believe that this fear of the unknown could potentially be more damaging to the property market than a vote to remain in the EU, simply because this has worked well enough in the past and prospects in these circumstances are likely to remain unchanged. This subdued feeling towards the investment markets is backed up by vendors such as Savills the estate agency, who have warned us in their recent results that the UK's residential and commercial markets could be placed on a slight halt, and a decrease in properties changing hands is expected to occur in the run-up to the EU referendum. The Royal Institution of Chartered Surveyors added to these worries, saying that the referendum has the likelihood to bring about ‘a degree of uncertainty for buyers that may negatively affect some elements of the market' – but which elements exactly and for how long we simply cannot pinpoint. However, this short-term uncertainty about our country's future could in fact produce an even more prolonged ambiguity for investors and developers in the housing sector; for this could in fact hamper new building developments and therefore raise prices on current available housing - with an increase in demand and a reduction in the supply of properties.
Commonly, looking back at the past and the traditional feeling surrounding general elections, there has always seemed to be a somewhat paralysing effect on the property market, and especially property sales in specific. This is particularly true with regards to the luxurious Central London market, as buyers weigh up whether to buy investment properties or not, especially in this area as property prices are more expensive - and thus a greater deliberation is required. If we look back to last year, a particular worry stemmed from the previous elections, as the possibility of Labour rising to power raised the threat of their proposals for mansion tax. Research from Hamptons International and Jefferies, demonstrates just how much of an impact general elections and comparable mass voting has on the property market, where productivity in this sector tends to dramatically slow down ahead of these events.
We can see from these graphs that on average, prices 12 months prior to an election are 4.9pc lower, whereas 12 months following the election – prices almost double, becoming 8.6 pc higher. This usually results from a release of previously subdued and built up demand, but with regards to a potential ‘Brexit', the uncertainty caused by this possible outcome could hit investor and buyer confidence levels, and house prices could consequently be pushed up to greater margins than those demonstrated here. This view is explored further through a statement made by Mark Granger, the chief executive of Carter Jonas' Estate agents, who proclaimed that: ‘as we saw before the referendum on Scottish independence, many occupiers and investors delayed their decision-making; we expect a similar wait and see approach as the EU referendum draws near, which could impact on sentiment and activity.' This analysis is backed up once again by the property consultants Knight Frank, who also suggest that ‘the Scottish referendum shows that we ought to expect a slowdown in housing market activity as we get closer to the polling date.' This uncertainty over the referendum's outcome and a possible vote for ‘Brexit' could particularly hit Central London areas such as Marylebone, where not only the number of sales could be slowed down, but supply levels too, as well as the confidence that developers have to invest in a property market, which could be viewed as being under threat.
Another issue surrounding a possible ‘Brexit' revolves around foreign investment, where potentially this result could deter inward investment into London and the UK in general; Rob Perrins, Berkeley Group's managing director, believes that ‘we must remain connected to Europe in order to remain influential, the city is so much better off within the EU than out of it.' A potential exit from the EU may affect investment in the high-end market, as well as the private rental sector, as the overall uncertainty has the likelihood to affect capital flows into the UK; a lot of Central London developments such as ones in Marylebone, are funded by overseas cash flows, and those in charge of the decision-making process may feel the need to buckle up and see how the property market plays out before they invest. Even if Britain's voters decide to remain in the EU, UK investment may still fall especially in the closest months after the referendum, due to the uncertainty caused by the process in general. Nonetheless, a loss of investment opportunities here could be levelled-up by the end of 2016/the beginning of 2017, where an investment surge could arise with many properties arriving onto the market - which should have been released before.
Moreover, should there be a ‘Brexit', another topic in discussion relates to a potential supply crisis involving skilled workers involved with the development of new investment properties, as a large number of the current populous incorporates EU workers in its supply chain. A good number of Britain's current subcontractors are from areas such as Eastern Europe, where a potential ‘Brexit' could cause this figure of foreign skilled workers to fluctuate, which would hit the property sector hard as it would intensify the already-troubling thoughts involving a skills shortage. Judging that it takes years to train skilled tradesmen, immigration reflects the easiest and quickest path to satisfying the current labour shortage. If we vote to leave, and if the UK's exchange rate weakens, there could be less benefits for overseas workers to remain in our ever-expanding Central London, and this could result in them leaving the UK altogether. Conversely, if the UK finds itself free from EU regulations, this could attract more inward investment, especially since there may be consequential implications in a post-Brexit for UK buyers looking to invest in mainland Europe. To explain, if, following an exit, extra rules were introduced for British buyers such as visa or money checks, then the foreign investment process could become more inconvenient. This would inadvertently produce a positive local effect, as perhaps British investors seeking investment opportunities abroad may be swayed into keeping their investment activity in the UK, and in promising Central London areas such as our Marylebone.
Other points of note include that, in the event of a vote for ‘Brexit', properties could be worth up to 18% less by 2018, in comparison to if the UK selected to remain in the EU. An analysis by the Treasury suggests that 2 years after a potential decision to leave the EU, UK property values could be between 10% - 18% less (as the table below demonstrates), than after an alternative vote to remain as we are.
If we left the EU, it is forecasted that property valuations would decrease, but as we can see from these figures, there would nonetheless still be a steady growth in price, which shows us that the situation may not be as perilous - as rumours convey them to be. In addition, although individuals who are first time investors could certainly find themselves hit as mortgage rates predictably increase and become more difficult to attain, this fall could actually be seen as a positive for sustainable property affordability and economic balance.
Please get in touch with me if you would like any more information regarding the incoming EU referendum vote, and how this has and could continue to affect Central London and especially the Marylebone property market, should Britain decide to leave or even remain in the EU. I look forward to discussing any interest with you regarding this important debate.