Brexit Continues to Dominate the Market
The troubles in the property sector in the United Kingdom shows no sign of abating as according to CoStar, a data collection company, the amount spent on deals for commercial property fell to £9.1 billion in the three months to the end of June. The figure was 34 per cent lower than the first quarter of this year, and 36 per cent lower than the same period last year, making it the second-weakest quarter in the past seven years. This comes at a time when the data released on Tuesday by HM Revenue & Customs revealed that the number of homes sold in the UK in June dropped by 16.5 per cent compared with the same month last year, while residential property transactions also fell to 84,490 in June 2019 from 93,520 in May.
Mark Stansfield, head of UK analytics at CoStar, said that the activity across the whole market has slowed since the number of deals has fallen to the lowest level than the first quarter of 2013, and the inertia in the market has been caused by Brexit uncertainty, as buyers held back because of it, dampening trading. He added that uncertainty had increased significantly in the past four or five months (coinciding with the time when extension was granted to the UK by the European Union), and evidence showed sellers are not willing to accept discounts, while a lot of investors seem to be in a wait-and-watch mode to get over the domestic political uncertainty.
Last month figures from property consultancy Cushman & Wakefield, reported that investment in central London offices fell more than a third in the first half of the year, as investors were sitting on the side-lines until further clarification on Brexit outcomes. It was reported that investors were on track to trade £5.5 billion of central London office buildings in the first half of 2019, as Brexit had cast a shadow over one of the healthier property markets in the country. While the obvious reason was Brexit, but it only explained a part of the decline. James Beckham, head of London investment properties at CBRE, said that there seemed to be a stand-off between buyers and seller, who feared withdrawing their property off the market, if they do not receive high enough offers and were reluctant to place their building on the market.
Experts say that sellers have become cautious due to a small number of office transactions and activity continued to be held back by a lack of available opportunities. Due to the strong demand for office space from shared office groups such as ‘WeWork’ and tech companies, the London office market has proved more resilient than previously expected. While the data by Cushman & Wakefield showed that London office market was suffering from Brexit related uncertainty, figures by CoStar shows that the impact of the political crisis is greater than that, implying serious consequences for the whole industry.
As foreign investment fell by 39 per cent to just over £4 billion in the second quarter of the year, the drop-in demand from overseas buyers has been one of the main reasons behind the sharp fall in transactions. For the first time in more than eight years, Asian investors were net sellers as investors from China and Hong Kong have been relatively inactive over the past 18 months due to restrictions on capital outflows, after a huge inflow in London offices over the past few years. Recently it was reported that Chinese investment into central London real estate property had declined to its lowest level in two and a half years, reflecting greater scrutiny by the Chinese government as it looked to slow a global deal-making spree. However, American buyers increased their spending on commercial property, helping to offset the loss from Asian buyers.
Surprisingly enough, despite the weakness in the retail sector which itself is grappling with problems due to Brexit and increased costs and where several high profile chains either went into administration or closed stores, the data reported a small recovery in retail property. Helped by the £429m sale of 12 stores of Sainsbury’s to a US investor and a revival in shopping centre volumes, investment into the retail sector grew by 30 per cent over the previous three months to £1.6 billion. However, experts are not reading too much into it as they noted that the retail market faced plenty of challenges. Retailers have been going bust or are on a cost-cutting spree as the sentiment is weak and there have been lots of store closures and company voluntary arrangements.
The industry might find solace from expected monetary expansionary policies that are being expected by the central bank to boost the economy. This would reduce the cost of borrowing, which might spruce up the demand for property. Brexit remains the most significant impediment for the commercial property, and the timely and clean exit from the EU would be the most significant support for the industry. Demand from international investors might fall further if the global economic growth stalls or declines, and the trade war between the US and China continues.
Sterling Continues to Plunge as Risk of No-Deal Brexit Increases
As the dust settles after weeks of campaigning and politicking, Boris Johnson was named as the new British Prime Minister and his agenda seems to be blunt and straight with a come-what-may: getting the United Kingdom out of the European Union by the latest deadline of 31 October. However, there is no certainty as to how the coming months will play out and as he told Parliament he would be seeking a fundamentally new deal, he has set himself on a collision course with Brussels. While the market seemed to be unperturbed by the accession of Mr Johnson, it seems to be the calm before the storm as the market heads for a period of increased uncertainty.
Until now, it is the foreign exchange market which has been battered by the whole Brexit saga as the equity and fixed income market has shown gains, proving many analysts wrong. However, the pound has fallen tremendously since the result of the 2016 EU referendum. The currency recently touched a six-month low versus the euro and a 27-month low against the dollar and has lost more than 5% of its value since early May. Many experts believe that the currency is now the true barometer of the sentiments of the investors and the expectations from the Brexit. After Mr Johnson was declared the incumbent prime minister, the market remained largely unmoved, indicating that his victory was largely priced into sterling. However, it rose on 25 July despite the hard-line Brexit credentials of the new PM, which many attributed to profit-taking from investors who had shorted the currency earlier. But the pound has fallen since, reflecting the elevated risks around his appointment.
Johnson this week reiterated that the Northern Irish backstop must be removed to avoid a no-deal Brexit and repeated his pledge to renegotiate the withdrawal agreement. However, his ambition and the sterling fall face down after the European Commission President Jean-Claude Juncker told Johnson that the deal agreed by Mrs Theresa May was the best and the only Brexit agreement and any new ideas put forth must be compatible with the original withdrawal agreement. Investors are also waiting for the Bank of England to give its monetary policy decision at the start of August, and while rate cut is not expected, the market would be focusing on the assessment of the current economic slowdown in Britain. However, the possibility of a rate cut could be far-fetched at the moment as wage growth continues to outstrip price inflation, though UK data continues to sour under the shadow of Brexit uncertainty. Many believe interest rates would not be changed for the time being if Article 50 is extended to give more time to break the impasse or if an election takes place.
Whatever the outcome of the Brexit would be, it would have consequences for the British pound. Experts believe that should Johnson soften his perspective on Brexit, and the probability of hard-Brexit starts to decline, the pound would rise and can reach up to $1.30 or $1.35. However, there has been no sign of a softening stance by Johnson, and his desire to push for Brexit has increased the chance for some unfavourable Brexit outcome or a possibility of an early general election, due to disagreements on Brexit between Parliament and Johnson.
Market experts reckon that weakening economic data could exert downside pressure on the pound in the long run, but political headlines will drive the currency in the near term. Investors are getting increasingly negative on the currency as the sentiment towards the pound does not seem to have improved and the market should brace for further uncertainties. The pressure is certainly on the freshly appointed PM to act quickly as the deadline is less than 100 days away, and all the parties involved seem to be in no mood to compromise.