Brexit: Financial Armageddon Or Property Opportunity?

Britain has voted to leave the European Union after a referendum result that will see the UK break from the EU after more than 40 years. Following the announcement, the pound plunged to its lowest level since 1985 following last week's result.

While many experts say the real repercussions won't eventuate for two years, the effects of the result are currently being felt in particular with financial markets as they plummet across the globe.

The impact of Brexit will likely have flow on effects to Australia, including the property market with Australians set to enjoy cheaper British holidays, at least in the short term.

Let's look at what the property and financial experts have to say.

REA Group
REA Group chief economist Nerida Conisbee said the uncertainty which emerged could impact on the commercial property market in Australia.

Ms Conisbee said Australia tended to attract a lot of global capital for commercial property and, in many cases, would usually be competing with locations within Europe for this capital.

“With the level of uncertainty now in Europe and Britain, Australia will now look even more attractive for commercial property seekers,’’ she said.

She said London was a destination for many Asian property buyers, who could potentially turn their attention to Australia if uncertainty remained around the UK.

“Australia is going to be seen as increasingly safe, particularly compared to the volatile European environment,’’ she said.
Commonwealth Bank

Commonwealth Bank chief currency strategist Richard Grace told The Australian Financial Review that the Aussie dollar could keep falling until month-end because of the large falls set to occur on the world's major share markets, as a lot of local asset managers are over-hedged on their offshore asset exposure.

CBA Chief Economist Michael Blythe also commented on Britain’s landmark decision to exit the EU.

“The debate about the implications for economies and financial markets is just the beginning.

"While the UK will be most affected, Europe (and the rest of the world) will not emerge unscathed. Policy makers in the UK and Europe will be tied up for years trying to unravel the economic knot," he said.

Mr Blythe said the main argument against Brexit was the potential economic costs. These costs are difficult to estimate. But all the serious modelling work suggests the impact will be “large” and long lasting.

"The direct impact of Brexit on Australia will be fairly limited, partly because of our Asian orientation. We are exposed, however, through our services trade (tourism and financial services).  The bigger threat may be from weaker commodity demand and lower commodity prices that could drag on Australian incomes.

"The expected hit to European and global growth will impact commodities. And this hit will filter through to views on the RBA as well.  At this stage, we remain comfortable with our call for the RBA cash rate to come down to 1¼%.  But that could now happen a little more quickly than the 3‑6 month timeframe we’ve been suggesting.”

Colliers
Colliers' 2016 global investor survey placed London as the preferred destination for offshore property market investment followed closely by Melbourne and Sydney. If a UK vote to leave the European Union was passed on June 23rd, this would most likely have a negative impact on business and investor confidence, and boost demand for safe havens further.

Uncertainty surrounding the future of trade agreements would presumably take a significant amount of time to work through, fundamentally altering the transparency that property owners find crucial to making investment decisions. It could temporarily tarnish the appeal of the London property market with global investors, improving the outlook for other major capital cities. If the results of our global investor survey are followed, Melbourne and Sydney are well placed to benefit from capital flows, should the London commercial property market lose its lustre.

Of course, investors could take a far longer term outlook, keep calm and carry on in the expectation that the UK will be prosperous outside of the EU. It is considered one of the largest global economies behind the US, China, Japan and Germany. Prospects for the UK outside of the EU would be far different to those faced by the likes of Greece during the crisis of 2011-12 when economic calamity was high on the list of possibilities.
JLL
Chris Ireland, UK CEO of JLL, says: “Much will depend on the speed of negotiation, the wider political picture and whether a clear direction of travel and timetable for an EU exit is established early on.

“Even if it is effectively ‘business as usual’ for the UK in terms of trade and legislation until 2018, such a major change will inevitably create uncertainty in the economy and real estate markets. In the event of a well-managed exit these impacts will be largely confined to the UK.”

For now, uncertainty will weigh heavily on companies, potentially leading to some leasing decisions to be put on hold or reassessed entirely. “In the short term we may see a weakening in occupier demand. The impact on rents may be limited by tight supply, but activity will be adversely hit while initial uncertainty about direction and timing continues,” said Ireland.

The UK’s property markets face an unsettled period. “The initial correction may be most severe but should be followed by an upturn as opportunities re-emerge in UK core markets and benefits of weak sterling are recognised,” says Ireland. “Sentiment and relative pricing will be key.”

Annual UK price growth in May slowed to 0.01 per cent in prime central London, the lowest rate since 2009, it was clear the market was sensitive in the lead-up to the referendum. 

The Brexit vote looks set to push already cheap fixed-rate mortgages in the UK to new lows, with a raft on lenders likely to cut borrowing costs for new customers in the coming days, according to mortgage broker John Charcol.

Header image: flickr.com/photos/141776778@N02