Explained: UK property & the 2017 election for GCC investors

Explained: UK property & the 2017 election for GCC investors

On June 8th, just 12 months’ after the EU referendum, Britons head to the polls for a snap general election. Below Adam Price, Managing Director for Global Sales at Select Property Group, explains why it’s been called – and what investors based in the GCC need to know about its potential impact on UK real estate.

 

That’s right, the UK has got another important decision to make.

Less than 12 months after the landmark EU referendum (and a little over two years since the last general election), Britons have another date with the polling stations.

I know by speaking to many people here in the GCC, this amount of political activity can be difficult to comprehend. (Believe me, many British people are finding it hard to come to terms with, too!)

But it’s understandable that some investors in the region have asked whether any of this political upheaval is going to impact on their current UK property investments. After all, many in the GCC buy assets in Britain because it’s a market renowned for its growth, its strength and, crucially, its stability.

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Adam Price – Managing Director Global Sales at Select Property Group

Brexit stunned analysts and investors around the world. Let’s not forget that this was an event that Europe had never seen before; one of the continent’s largest economies voting to leave one of the globe’s most powerful political unions.

And now we have another a snap general election. It’s been a mere 24 months since the last one, but the UK’s political landscape has changed dramatically during that time.

So surely Britain’s property market is bound to feel an impact eventually?

What’s happened?

On April 18th, Theresa May called a press conference outside 10 Downing Street. She emerged from the famous black front door to announce that she had called a general election for June 8th.

After six weeks of campaigning by all the UK’s major political parties, Britons head to the polls on Thursday.

Why has an election been called?

After initially stating she wouldn’t call a snap general election, Mrs May has ultimately decided to change her mind.

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I believe there are several reasons that could explain why this decision has been made. Firstly, it’s worth remembering that Mrs May was not elected as PM by the British public, rather she won a Conservative party leadership contest following David Cameron’s resignation last year. So this could be viewed as a way of her strengthening her leadership should the majority of the country vote for her.

However, it’s widely considered that upcoming Brexit negotiations have prompted Mrs May to call for this election.

The political landscape in Britain has changed dramatically since the 2015 general election as a result of the 2016 referendum and the resulting vote to leave the European Union (EU). After beginning the formal process of leaving the EU on March 29th, the prime minister is aware just how difficult the next two years of negotiations will be. By calling an election, and the hope of securing a strong victory, it will effectively give her more support in parliament when it comes to making key decisions on the terms of the UK’s exit.

may and corbyn

Who is likely to win?

As I write this, the opinion polls suggest that Mrs May’s Conservative party is on course to win the election.

But it’s very close to call.

That’s because the polls suggest rival party Labour, led by Jeremy Corbyn, has gained a lot of support during the election campaign.

Put into context, the Daily Telegraph’s average polling averages had the Conservatives ahead of Labour by 20 points on April 21st. The same index on June 2nd had Mrs May’s party ahead of Mr Corbyn’s by just six points.

It’s important to bear in mind that pollsters famously didn’t predict a landslide victory for David Cameron in 2015, the Brexit result, and neither did their counterparts in the US predict that Donald Trump would become president.

In with regards to politics over the last few years, I think we’ve all become prepared to expect the unexpected!

What does a general election mean for Brexit?

Over the last few weeks this is something I’ve discussed at length with my clients based in the GCC.

Firstly, it’s important to be clear that the result of this election won’t change Brexit – the UK is leaving the EU no matter what happens on June 8th.

However, the election can determine the terms of Brexit. That’s because all the main political parties have differing opinions over the terms of the UK’s withdrawal from the EU.

Mrs May, for example, would likely be committed to a ‘hard Brexit’, which would include a complete uncoupling from the Union. Labour would likely pursue a ‘softer Brexit’ approach, as would the Liberal Democrats, who have styled themselves as a pro-EU party.

What is clear, though, is that no matter who emerges victorious, Brexit will cause some degree of economic uncertainty. That’s simply because it is such a landmark political event, one that has never happened before and, therefore, difficult for market analysts to fully understand just what is going to happen during the complex period of negotiations.

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But by calling this election, Mrs May hopes that no matter who wins, both the government and parliament have a greater level of agreement on key Brexit issues before official talks with EU leaders begin.

“Division in Westminster will risk our ability to make a success of Brexit and it will cause damaging uncertainty and instability to the country. So we need a general election and we need one now, because we have at this moment a one-off chance to get this done while the European Union agrees its negotiating position and before the detailed talks begin.” Theresa May, April 18th

How will the election affect GCC-based investors with UK equities?

I know many investors with stocks and shares investments in the UK that have had to endure a high degree of volatility over the last 12 months. And, as many of them have already come to accept, they should be prepared for more in the coming months, too.

In the weeks since the election was announced, the FTSE 100 has grown steadily, a sign that the markets view it as a good thing. A newly elected government – and a parliament more in agreement over the direction the UK should take following Brexit – should, in theory, create a greater level of certainty for financial markets.

But if you own UK stocks and shares, you should be aware that this performance is only likely to be brief.

Once the election has finished, attention will quickly turn to the two-year period of Brexit negotiations. As we’ve all seen ever since the EU referendum, markets are likely to be extremely volatile during this time.

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The no. of new households p.a. has exceeded the number of homes built in every year since 2008, and the gap has grown in recent years, new dwellings (bars) by tenure, and new households (line), 1972-2013 (projections of new households to 2020) UK government.

How will the election affect GCC-based investors with UK property?

Let me be absolutely clear – right now, nothing has changed that should impact greatly on the performance of British real estate.

On April 24th, just a few days after the election was called, I noted the new data published by Rightmove, one of the country’s biggest property portals, revealing that average UK property prices have now reached a new record high of £313,000 (2.76 million yuan). For me, this underlines the continued strength of the market.

Brexit has already impacted on financial market performance over the last year, and the election may also do the same over the next few weeks. But UK property is largely resistant to economic and political events.

Why? Because property performance is directed by supply and demand levels and, right now, the UK is in the middle of a property shortage. The National Audit Office estimates that the country needs to build 174,000 new homes each year just to meet current demand levels and government targets.

Quite simply, a general election, and any uncertainty it brings, will not change this undersupply, and investors are likely to see yields and overall returns continue to rise.

Even if a new government were to introduce radical shifts in current housing policy (which are not widely expected), they won’t immediately address the extent of the shortage and, consequently, halt current performance.

A currency window of opportunity for international investors

Many of my clients have already identified it, but I cannot stress enough just how huge the opportunity to invest in UK property is right now for investors based in the GCC!

Both Brexit and news of this general election have made the pound, a currency renowned for its resilience, extremely volatile.

Sterling rose sharply against the US dollar after Mrs May announced the election. But it then dropped 0.5% against the greenback overnight on May 31st after one poll raised the prospect of a hung parliament.

Furthermore, the pound fell to a 31-year low against the US dollar following last year’s EU referendum and has not recovered its losses.

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Source: XE.com

Put into context, if you’re dealing in dollar-pegged currencies, UK real estate is 16% more affordable than it was 12 months ago.

Of course, I’ve no doubt that following Brexit, and with the UK’s economic future much clearer, the pound will once again regain strength. But during the general election and this two-year period of Brexit negotiations, it is likely to suffer continued gains and losses, meaning the best time for international investors to buy is now.

In summary

The general election is another political event that GCC investors with interests in the UK need to follow closely.

If you have stocks and shares, you should expect some volatility, and even more in the two years ahead during key Brexit negotiations.

But as I’ve been telling my clients over the last few weeks, for real estate investors this is NOT a time to panic. In fact, I’m incredibly optimistic and you should be, too! This is a time to realise the immense opportunity currently available.

The election is unlikely to impact on property performance. Brexit, and all its complications, is unlikely to impact on performance. Demand for property is high and supply is low – neither of these political events changes that.

If you’re based in the GCC and still have concerns, please get in touch with me and I’d be happy to discuss them in more detail.

But my main message to you would be this – buy now, take advantage of the currency opportunity, and be safe in the knowledge that you’re likely to gain much greater returns in the coming years.

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