DMZ investigates Brexit’s impact on London where research has suggested that large retail funds have closed portfolios, locked out investors and large scale redemptions from investors who are worried about property values shows that the London property market may be struggling.
Kames Property Income fund saw Brexit coming and went into the period with 33% cash to meet redemption requests. Additionally, a fair value adjustment, aka exit fee of 10% was applied to investors wanted to redeem their money. Notably, an investor who remained in the fund would have lost 1.8% according to FE trustnet.
More worryingly, the fund now has £433m in assets compared to £515m at the end of May.
David Wise, who runs Kames Property Income fund notes that thanks to their forward thinking, they were one of the few funds that stayed open through post-Brexit period. Many other funds stopped trading or had to liquidate. The Chancellor, Bank of England, Fitch and Moody’s have warned that house prices could fall from 10% – 25% by 2018. The Treasury said that the average house in London will be £62,000 cheaper in two years after a vote for Brexit.
The knock on effect could be less houses are being built, meaning middle income families would struggle to get homes and number of labourers would naturally decrease. DMZ has previously noted that foreign investment may curb this from happening to London.
Conversely, as Britain tries to hammer out the terms of article 50 and consider their options, investment into London is not slowing. Four of China’s biggest banks this month agreed to finance the first stage of a £1.7 billion transformation of an old East End dock into a hub for Asian businesses. Moreover, Chinese companies are on track to invest a staggering £4 billion in London property this year, beating the 2015 record by a third, according to data compiled by CBRE Group.
“Chinese investors are betting that the UK will do well in the Brexit talks, and if it doesn’t, companies will still choose London as their base,” said Michael Marx, former chief executive officer of developer U+I Group. “London didn’t become the financial capital of the world overnight and it certainly won’t lose that status so quickly.”
The next big factor the global economy needs to consider is the impact of increases to interest rates.
Government bonds are being dumped globally and the general trend is that we will soon see real estate values fall. The commercial real-estate boom of the past few years has been driven by global investors seeking out returns better than those found in low-yielding bonds. But that dynamic could start reversing, analysts said, as ultrasafe government bonds start to offer yields that make commercial property look less desirable in comparison, given the potential risks.
DMZ thinks if interest rates stay low, we will not see investors sit on bonds and they will not sit on cash.
That leaves an interesting question for anyone involved in UK Real Estate to consider: will we continue to see the Equity markets boom or will property markets be seen as a safe heaven?