To sell or to buy, that is the question

Those who invested in British property years ago wonder if it is time to sell, while those who have missed the earlier boat are toying about buying, aided by weak currency.

OF late, property consultancy Rahim & Co has been inundated with questions regarding the United Kingdom residential market.

The decision by the British on June 23 to leave the European Union (EU) has caused many to question whether London would be able to retain its pre-eminence as a world city, or its status as a financial centre.

For those who have already bought into the British market, the question is: Should I sell now?

For those who have not, it would be: Should I buy now?

These questions are not unique to Malaysians who have an interest in the British market. Buyers and investors around the world are asking the same thing.

The second group wants to buy because they perceive that they have missed the boat when, between 2009 and 2014, many of their friends and family had bought into that market. Some could have bought earlier.

Lion’s share: Whitmey says international investors bought 2.19bil of commercial properties in London between July and September. 

Strutt & Parker senior partner Andy Martin says: “If you decide to sell, what would you do with the money? Where would you invest it?”

He was speaking at “The Malaysian Property Market: Opportunities Amidst Uncertainties” organised by Rahim & Co earlier this week.

“If you break the market down into sectors - retail, hotels and office - there should be a benefit in tourist-related assets. These should improve in value.

“In the office market, we are seeing a reduction in value. But if you look at the market over a longer term, we have always seen a revival because London is a strong city.

“Real estate is a ‘patient’ capital and I will not panic. In time, the currency will improve and things will be clearer. At the moment, there is a lot of interest there now,” he says.

As for the residential market, Martin says his company deals with the £1mil and above segment and that there is little interest in this segment for now.

He says the segment of the residential market priced just below £1mil and above had been impacted even before the June 23 referendum due to the rise in stamp duty in 2014 and again in 2015. The second round of increase in 2015 took effect on April 1, 2016 as part of the British Government’s policies to restrict market growth to reduce speculative buying.

Martin says there was also a series of events which called into question the performance of the British economy, all of which impacted the property market which has seen a slower demand - or a softening of the market - since 2014.

Opportunistic investors

Martin’s views are a contrast to that of a UK Savills team headed by director for development Tim Whitmey, who flew into Kuala Lumpur about 10 days ago. Two solicitors from DAC Beachcroft and the Savills team met investors.

At a session with the press, Whitmey said he does not expect to see growth in the residential market in 2017 and 2018, with possibly some growth in 2019.

That does not mean trade will come to a standstill. On the contrary, there will be many “opportunistic investors” who will be entering the market to take advantage of the weakening British pound, he says.

“The biggest effect on the prime London market has noting to do with Brexit, but the rise in stamp duty,” says Whitmey.

“The more expensive the property, the higher the stamp duty. And the fall in the pound will attract the opportunistic investor,” he says.

Post-Brexit, Whitmey says international investors returned to London, buying up £2.19bil of commercial properties in Central London between July and September, accounting for 78% of the total transaction volume of £2.81bil, compared to 50% for the same period a year ago.

Over £695mil of Asian capital has been deployed in the city since June, with Hong Kong investors being particularly active and US money accounting for £685mil worth of transactions.

European investors bought £482mil of commercial properties in Central London in the third quarter of 2016.

Whitney says medium to long-term international investors, including those from Hong Kong and Singapore, remain positive towards Britain and are actively seeking opportunities.

The current appetite tends to focus on core assets with stable income rather than investments with leasing or development risk, he says.

That focus may change, however. A potential risk for investors is the prospect of rising interest rates.

Legal firm DAC Beachcroft says there will be more bumps down the road as Britain goes through the “divorce” from the EU.

The recent surprise fall of the British currency in early October - known as the flash crash - was just one of them.

“There will be other (surprises) as we draw near to March 2017 when the British Government triggers Article 50, which will then set in motion the two-year deadline for Britain to leave the EU,” partner David Manifould of DAC Beachcroft says.

There will be “no quick fix” post-Brexit as the exit from the EU will take about two years. “There will be some potential after-effects which are still not clear today,” he says.

The property sector two years after that, from 2017 to 2019, will continue to face volatilities, he adds. Manifould and his partner Glenn Ruddy flew into Kuala Lumpur to meet about 60 investors and potential investors.

Best locations

The group comprised Malaysians who had bought into the residential market and who are considering divesting their investment, while others were considering entering the market. It also included Malaysian developers who have not yet entered the UK market.

Savills head of residential research Lucian Cook says: “There will be opportunities across the prime London market for those prepared to take a medium term year view, but it will require sellers to recognise the subtleties of a market that is likely to distinguish between the very best stock in the best locations and the rest.

“Looking further ahead, we know that the prime London markets have generally rebounded strongly after a period of adjustment,” says Cook, adding that the tax backdrop will continue to be factored into buying decisions.

In what may be a sign that reality may be settling in, Nationwide Building Society on Nov 2 reported that British house prices did not rise in October, the first time in 16 months it failed to do so.

Calling it “a stagnation in values” after 15 months of consecutive increases, it said transactions were down by 10% from a year earlier.

“While the economic outlook is uncertain, solid labour market conditions and historically low borrowing costs should provide support to buyer confidence,” its chief economist Robert Gardner told Bloomberg.

Already, Frankfurt, Paris and New York have been putting together teams to take over London’s status as a financial hub.

According to Savills Autumn research report, tenants in the financial sector currently account for a third of London’s prime rental market although this proportion has been decreasing over the last 10 years as tech, media and telecommunications enter the capital. The underlying uncertainty is expected to temper rental growth prospects, with tenants more budget-conscious.

There may be a flight to quality among buyers.

A savvy Malaysian investor who declined to be named tries to bring clarity to the whole Brexit challenge.

There are just two fundamentals one needs to bear in mind, he says.

“Brexit - or Britain leaving its trading partner of some 40 years - means the role of London has changed,” he says. These changes will continue for the next few years and along the way, they will be volatilities.”

There will be changes in immigration policy. The European population will not have the ease of entry as before, and vice versa. This means the flow of people, trade and a whole slew of everything - both ways - will be reduced. There will be less demand for property and the overall rental market will be affected, particularly when industries shift to other countries, he says.

The second fundament is passporting rights - the freedom of entry and exit - are expected to come to an end. These are the two most significant parts of the whole issue.

The UK has no access to the 500 million or more people and it depends heavily on foreign direct investment. This means the business environment has changed, he says.

There may be a surplus in commercial property. The retail sector may diminish, resulting in less demand.

“So this issue about a weaker British currency is only a side factor because the two fundamental issues do not change,” he says.