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|12 February, 2019

London's after-Brexit party will be dreary affair

Overseas punters have already shown some faith in May’s ability to get a Brexit deal through parliament.

Britain's Prime Minister Theresa May leaves Downing Street, as she faces a no confidence vote after Parliament rejected her Brexit deal, in London, Britain, January 16, 2019.

Britain's Prime Minister Theresa May leaves Downing Street, as she faces a no confidence vote after Parliament rejected her Brexit deal, in London, Britain, January 16, 2019.

REUTERS/Clodagh Kilcoyne

LONDON - London’s Brexit after-party will be a dreary affair. If Prime Minister Theresa May can avoid a chaotic exit from the European Union, fears of a recession and subsequent property plunge should dissipate. But the capital may not look much more appealing to foreigners.

Overseas punters have already shown some faith in May’s ability to get a Brexit deal through parliament. Despite the apparent risk of a no-deal Brexit, foreign investment in London residential and commercial property totalled nearly 17 billion pounds last year, according to property agent Knight Frank, only a slight decline on the year before, led by South Korean, American, and Chinese investors.

One reason for the recent demand has been the weak pound, property agents say. Take a hypothetical London office block, worth 500 million pounds in April 2016, or $710 million. Since then, London commercial property prices have flatlined, but the collapse in the pound would have brought the price in dollar terms down by 8 percent by the end of 2018. South Korean investors meanwhile could buy the same property for 10 percent less in their respective currency, according to Breakingviews calculations.

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Posh residential property looks even cheaper. A prime London property worth 5 million pounds in 2016, might have fallen in value by 10 percent, according to Coutts analysts. In dollar terms, the price would have fallen from $7.1 million to $5.9 million, an 18 percent decline.

A Brexit deal could paradoxically drive away some investors. The pound has risen since last year, and will likely climb further if Theresa May manages to secure even a flimsy deal, making London property more expensive to investors who hunt for currency bargains. The pound could rise as much as 5 percent to 1.34 against the dollar, according to JPMorgan analysts.

Currency is just one factor. London still offers relatively high commercial rental yields, and prestigious high-end homes. Yet even in the event of a deal, political uncertainty won’t disappear. Conservative party hardliners will agitate for a more severe break from the EU, and the risk of a hard-left administration led by opposition leader Jeremy Corbyn, who is more likely to raise taxes on property, will endure. Paris and Berlin are probably safer places to put your money.

CONTEXT NEWS

- Foreign investors spent a total of 16.6 billion pounds on London commercial and residential property in 2018, a decline of 6 percent compared to 2017, according to data from real estate agent Knight Frank.

- Foreign investors bought 13.5 billion pounds of London commercial property in 2018, and 3.1 billion pounds worth of London residential assets.

- Prime London residential property prices have fallen by 9.6 percent since April 2016, according to an index published by British private bank Coutts. Meanwhile, City of London office property values have remained unchanged, according to Knight Frank.

© Reuters News 2019

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