Brexit and the Property Finance Market
By finchrob, Jun 28 2016 03:47PM
It’s been the topic of conversation since the very early hours of June 25th 2016 - the Brexit vote has shocked the financial markets and both political and economic analysts have been attempting to interpret the results as best they can. Before launching into our opinions the key point is we don’t know the full implications of our decision to leave the EU and it will be several years before some even come to light given the complexities of our relationship with Europe.
Despite the hammering banks and housebuilders have taken in the stock market, we don’t see the property finance market changing dramatically once things settle down. The property market is very dependent on third party funding and the range of funders currently in the UK market is as plentiful as we seen. The credit crunch 8 years ago sucked most of the liquidity out the market and we can’t see that happening now. Firstly, there is a £250bn provision from the Bank of England to guard against liquidity issues that may come out of the Brexit vote. Secondly the diversity in sources of funding for property professionals is such that there is isn’t the same reliance on the high street banks as there once was.
The property market itself in the 6 months before the referendum had been fairly static. After a few years of strong growth in many locations the residential market had cooled off and in some parts of central London prices had even fallen. The fundamentals behind this were overseas investors being more cautious and the domestic market struggling with affordability under increasingly onerous mortgage requirements. Overall there are still buyers and renters out there for residential property and tenant demand for commercial space in most areas. The key factor in the health of the UK’s property market is demand has consistently outstripped supply and this hasn’t changed overnight.
Some are even expecting a strong property market over the next year or two. A weakened pound and subdued property values could see international investors return, particularly to London. The volatility of the stock market and expectation of continued low interest rates means bonds and shares are that appealing for the institutional investor. So both direct and indirect property investments could be attractive as property lending returns are relatively strong and yields from direct investment are significantly above typical fixed income yields.
The main negative factor in our opinion is simply the uncertainty this will bring and those sitting on their hands while they see how things play out. How long this lasts are difficult to tell but we expect people to come to terms with the fact that leaving the EU is a long journey and life must go on in the meantime. One longer term effect could be that the ratings downgrades make bank debt more expensive for some borrowers but this is unlikely to be a significant impact as long as the economy steadies itself fairly soon.
So in summary we think the collective interests of those involved will make the transition as smooth as possible and the economic impact in the long term fairly minimal. Practicalities, like comparable trade deals and replacing EU subsidies to sectors like farming with central government subsidies, should be deliverable. However, in an increasingly globalised world the aim should be to reduce international restrictions on trade and labour movement, encourage multiculturalism and for countries to open themselves up to the world. So whilst the vote may not hurt us in our pockets as much as the Remain camp have suggested, we do see it as a narrowing of our horizons.