As Brexit nears, can you afford to miss out on the currency advantage?
One of the most common questions I’m asked by overseas investors is if now is the right time to buy London property. It’s looking increasingly like it is. Foreign investors may never get such an opportunity again, though the investing window is narrowing. In this article, I’ll explain why.
For foreign investors, currency matters
A quick Google search or a few clicks into the currency pages on Yahoo! Finance and you can get a look at how the pound tumbled immediately after the EU referendum back in 2016. The pound’s value has traded in a fairly narrow band since then, bubbling along at around 10% to 20% below its pre-Brexit vote price, depending upon your currency of choice. The uncertainty of the Brexit outcome is holding the value of the pound in this range. In recent months, we’ve had a glimpse of what may happen in the two scenarios most likely on offer: a ‘no-deal Brexit’ or an agreed deal.
- In September, when the Prime Minister Mrs May announced the heightened possibility of a no-deal Brexit, the pound fell by around 1.5%
- After the preliminary deal was announced in November, the pound rose by around 1.5% – despite the opinion that Parliament would vote against the deal
- A day or two later, the pound fell by 1.5%, when five of Mrs May’s cabinet resigned in protest over the deal
Sterling is being held in a tight range. However, it seems to have created a floor. All the potential bad news is out there; the possibility of a no-deal Brexit and its possible effects are well known.
At this moment, it looks increasingly like a no-deal may happen. So the biggest risks are on the upside. If a deal is struck – which is actually in the interest of both the EU and the UK – sterling could take off. The discount that foreign investors could achieve on property deals now could be erased.
At current exchange levels, foreign investors are getting a big bang for their buck. Holding back now risks missing a once-in-a-lifetime opportunity to invest in a global city that benefits from incredible long-term fundamentals.
Foreign investors are returning to London
The signs are that foreign investors are increasing their presence in the London market again, as we head toward Brexit day (March 29th 2019). We saw this in the immediate aftermath of the EU referendum when foreign investment into London peaked as the pound plunged. The proportion of London property sales to overseas investors has receded since, but in the last few months, it has started to rise again.
London property prices are set to bounce
In a series of recent articles, we looked at why London property prices could be about to bounce and where they are likely to rise the fastest. In our article ‘Could this overlooked UK city produce turbo-charged profits?’ we examined fundamentals such as:
- Massive regeneration taking place and revitalising swathes of brownfield land
- Enormous infrastructure upgrading and spending
- Huge population growth-boosting demand for new homes
- Continuous undersupply of new homes to satisfy demand
- Increasing FDI in tomorrow’s digital economy
We suggested ignoring the headlines and searching the detail when we asked, ‘Where are the hottest areas for investment in London property?’. We pointed out that some London boroughs offer rental yields of more than 5%, and capital growth is mostly highest in outer London boroughs, such as Redbridge (7.33%), Merton (4.99%), and Waltham Forest (4.82%). Investment in such locations is supported by many factors, including:
- The infrastructure investment in London (especially Crossrail) has made travel across the city far easier and faster
- 24-hour underground services allow people to travel more freely for leisure purposes
- The huge amount of regeneration taking place in many Outer London boroughs is making them more attractive as places to live
London’s population is forecast to grow from less than 9 million today to around 10.5 million in 2041. In a property market that is already suffering from a severe imbalance between supply and demand, this growth is going to boost demand for homes even higher.
The challenge for overseas investors
The uncertainty caused by Brexit is holding sterling, for the moment. This uncertainty, plus other factors such as the reduction in mortgage interest tax relief, is also acting as a dampener on house prices in London. This could all be about to change. In summary:
- If a deal is struck, we could see the pound erase much of its post-EU referendum losses
- Property prices in London are showing signs that the falls are levelling and they could be about to bounce
- Some locations in London are already outperforming national averages
The challenge for overseas investors is, should you buy while the pound is still weak and you are still getting a big discount, or should you wait until stability returns and the potential money-spinning returns from the currency rate are erased?
There are bargains available in London now. Property prices, even if they take a short-term hit, should bounce back in time, with a strong rental market and increasing demand helping to create a good flow of income. For overseas investors, any rise in the pound’s value is money in their pocket.
London property investment benefits from a wonderful basket of strong fundamentals. The question overseas investors should ask is if they can afford to risk the currency advantage they have today.
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