It’s noticeable that in the last few months the Middle East has woken up and recognised to the political mess that we call Brexit, something they have largely ignored for over two years.
Sterling has fallen 13% against the USD and UK total returns lagged the rest of Europe by nearly 10% since the 2016 EU referendum. Until January this was enough to persuade overseas buyers to continue buying UK assets, with the desire to get a 6% to 7% income return and the prospect of a value and currency recovery when we left in March 2019. What we are seeing from meeting in the UAE, Kuwait and Saudi Arabia this April and May is a growing wait and see attitude, as at long last they recognise that a political deadlock could lead to the economic self-harm of a no deal. News takes time to filter down into overseas investors psyche, so it is ironic that the potential downside of Brexit is registering just when a political compromise is starting to look more possible.
We are at a cross roads. If we quickly find a sensible way to meet the expectations set by the 2016 referendum whilst preserving a stable and successful economy in the short to medium term, we will see the UK real estate market and GBP recover. This should bring Gulf investors back into the market over the summer and any lull will be barely noticeable. This withdrawal agreement will be a start, although we will then need to find a long term solution for our relationship with the EU, which could take time with a fragmented government. However, our country’s importance in the world and the significance of UK real estate is based in large part of the trust foreign investors have for the UKs structures and governance, a trust that is being shaken by Brexit. Trust may take years to rebuild but the sooner we start, the less damage will have happened and the earlier it will return. More tolerance in society, stability in our tax system and an innovation in business would probably be the best possible starting point for this.
The UK will continue to attract international capital, but if we are not careful we will swap long term generational investors for the hot private equity money that flows across the Atlantic when disaster strikes. As an entrepreneurial investor, the Palmer / Fiera Capital business will thrive in even the hardest of Brexits, but any sensible UK real estate manager would prefer the famous British common sense to prevail, allowing us all to do our little part in helping the UK thrive and to deliver outperformance to our investors.
Written Alex Price, CEO – May 2019