Brexit: Positioning for a property crash – but maybe it won’t happen at all
Comments from US property specialist Cohen & Steers’ president Joseph Harvey and analysis firm 4x Global’s managing director Olivier Desbarres, suggest there remain significant question marks against UK assets ongoing, regardless of the outcome of the Brexit negotiations.
Speaking in London on a visit to local investors, Harvey said that his firm was underweight UK – albeit spotting some pockets of interesting assets in industrial and self-storage units.
“We have been buying in the UK to protect against something that is better than expected on the Brexit front,” he noted.
There are secular trends affecting the UK property market as elsewhere, he added, such as the demand for industrial units linked to secular shifts in retail, driven by the internet, the likes of Amazon, and the need for ‘last mile’ delivery systems to customers.
In contrast, across the Continent, Harvey noted that Spain is a market that he “likes” for its fundamentals and prices that remain attractive.
As a manager, Cohen & Steers started in the 1980s with a focus on US real estate through listed property equities. It has since added global real estate, preferred securities, and commodities to its areas of expertise. Through its work on real estate investment trusts, Reits, it has an eye on particular sectors of the European property market, such as the German Reits market, as well as how such markets could be affected by property investors globally seeking to rebalance property exposure between private and public equity markets.
The property angle to the Brexit negotiations was put front and centre by Bank of England governor Mark Carney in the past week after he was reported to have briefed UK cabinet members on forecasts by the Bank that leaving the EU without a deal could trigger a property crash, with house prices modelled to fall by up to 35% over three years – effectively an economic crash as big as that experienced during the financial crisis of a decade ago. He is also reported to have warned that unemployment could rise to double digits as both interest rates and inflation rose.
Another of the latest views on Brexit comes from Desbarres (pictured), who has written in a recent note that there is a growing possibility that the UK may end up remaining in the EU.
While in theory the UK would exit the EU by 30 March 2019 regardless whether an agreement is struck, Desbarres, former senior economist, rates and FX strategist at Credit Suisse and Barclays, writes that: “In practise, however, we think there are a number of possible scenarios whereby the UK would remain an EU member for the foreseeable future.”
“For starters, the UK and EU could fail to agree on a post-Brexit deal. The British government will be reluctant to materially water down the already unpopular proposal which it put forward on 12th July while the EU will be wary of offering a deal which incentivises other member states to leave the EU on better terms and conditions.”
“Moreover, there has been vocal opposition to this deal in the UK, from both Remainers and Brexiters. While parliamentary arithmetics are complex, a majority of House of Commons members could vote against such a deal.”
“In this scenario, an already weakened prime minister May and Conservative government short of a parliamentary majority could put political survival ahead of ideology and hold a second referendum – a path backed by a majority of British voters and trade unions and by a growing number of MPs across the political spectrum.”
“Opinion polls suggest that British voters favour the UK remaining in the EU over leaving the EU without and in particular with a deal. In this scenario, the British government could, with the EU’s blessing, seek to reverse its decision to take the UK out of the EU which would likely have a material impact on UK yields, equities and in particular sterling.”
Uncertainty does seem to be affecting investor sentiment towards UK equities. Both the FTSE 100 and FTSE 350 have shed value in the past month, and they are both down from 5-year highs seen earlier this year in May.
Meanwhile, the UK 10-year gilt has moved from a yield below 1.2% in July to more than 1.5% in recent days.
The UK’s Debt Management Office announced that its sale on 6 September of £3bn of 2024 1% gilts was 1.92x covered. The sale on 11 September of £2.5bn of 2049 1.75% gilts was 1.76x covered, with yields on the highest and lowest accepted bids in the auction ranging from 1.821%-1.835%