It is the Summer of 2016 and the Foreign Exchange (FX) markets are in turmoil. With cable (£/$) at a 31-year low, the post-Brexit FX rate sways investors worldwide to skip third, and shift into fourth gear when it comes to penetrating London’s property market. One part of the globe was even quicker and went right into fifth gear, per the Chinese proverb, “a bird does not sing because it has an answer, it sings because it has a song.” Well, developers from Eastern Asia had their song; the London real estate market had just opened its doors wide open.
A Perfect Property Development Storm
Let’s give this some context. Asia’s wealthy were, as always, seeking ways to diversify and Brexit marked “high time” for them. Everybody loves a bargain and Asia’s business people had the liquidity to take advantage of the discount available in the UK for USD holders. Chinese, Singaporean, Malaysian and other Asian business people had accumulated huge sums of money over the years and as is typical all over the world, a large percentage of these funds were held in the worlds reserve currency, the US dollar (USD). The USD is the currency used in almost all commodity trading, think ‘Petro-Dollar’, and is the world’s deepest and most liquid store of value. With cable rates at a low point for the GBP, it meant that USD cash-ready investors had a window of opportunity where their dollars were worth 20% more in the UK market. In other words, the forex markets had lowered the value of the Pound relative to the US dollar. The market prices ‘dropped’ 20% in less than 100 days. Moreover, borrowing money was pinned down at less than 1.5% interest, a trend continued after the 2008 market crash. This perfect storm meant that business people could borrow at almost no cost and as a kicker get a 20% discount. A lucrative situation indeed. Let’s look at some of the ratios.
Brexit, Cable and Property Development
On June 23rd, 51.9% of the UK electorate voted to leave the EU, with the currency on June 24th holding steady at 1 GBP against 1.482 USD. Less than four months later, the Pound reached a thirty-one year low, at 1 GBP against 1.217 USD. The situation did not change in the start of the New Year with the crisis low reached in January with 1 GBP trading for only 1.205 USD. Later milestones that marked a recovery were reached in May and September of 2017 respectively, with the Pound breaking the 1.30 and the 1.35 milestones. Now we can discuss what happened in the interim while the Pound was in the 1.2’s. What really happened to the Pound in this specific moment in time? Brexit cannot really be deemed to have caused a market crash – because the low was short lived – but it had an overnight effect on the Pound as a currency. This effect may have been temporary, but it offered a window for holders of USD funds to buy at 80 pence on the Pound. These monetary inflows went towards the FTSE and toward large-scale property developments. The FTSE was selling for a dear Trailing Twelve Month Price to Earnings ratio of over 30 at the time. The property market in London was selling at a similarly dear level as rental yields stood at low single digit levels. This didn’t deter investors however because the perception of the relative stability of London compared to other cities was, and is, alive and well.
Stability in London Property and Developments
Property in London, for several reasons, holds its own. London is special. People want to live and buy property there because there is price appreciation, the rule of law is sacred, everything is in English and transparency is second to none. The de facto prestige that comes along with living in London is another reason for why half the common-wealth aspires to live there and half of the rest of the world does too. The sentiments that led up to the Brexit vote were undoubtedly related to this fact. The property market in London is unique. Like any asset class, the value of real estate fluctuates but the London market never falls quite as hard as the rest and tends to recover just that much faster. This is due to several factors other than the ones already mentioned. London is the world’s premier financial center. It is the largest center in the world for the following markets: Derivatives, FX Trading, Bond Issuance, Insurance, Metal trading and Bank Lending. All of this means that London attracts the worlds wealthiest people and that property prices trend upward with more stability than in other capital cities. The fact that the supply of new housing is not keeping up with population growth compounds the stability and attractiveness of London as a place to park money.
Not a Property Bubble
London cannot be deemed to be in bubble territory, like how Tokyo was in a bubble in the late 80’s. Japan at this time saw inflated property, stock market and other asset prices and these price levels crashed hard. Ever since, the Bank of Japan (BOJ) has implemented a record low interest rate policy not much different to the one that the West has recently been experiencing and asset prices have not recovered to the pre-crash levels ever since. The Nikkei peaked at around 38,000 in 1989 and currently stands at around 22,500. London is not Tokyo though. London is unlike any other city on the planet. It is arguably the most stable real estate market in the world. The fact that foreign money keeps pouring in and prices keep appreciating attests to this.
Foreign Direct Investment (FDI) Peak
The 31-year low cable rate that occurred should be regarded as a facilitator of FDI rather than a catalyst for the crash that never happened. London’s property market is unlikely to crash and even if it experiences a dip, it is likely to be temporary. No investor can escape the inevitable vicissitudes of the markets, but they can opt for the most stable market. This is exactly what investors have done over the years by choosing London and this is what happened in overdrive when cable rates meant London was temporarily on sale. This period will be jotted down in history as one of the most significant migrations of East Asian cash into the UK. Investments from China, Malaysia and Singapore are leading way to the birth of a new skyline in London, reminiscent to that of the downtown areas in Shenzhen, Guangzhou, Beijing, Shanghai, Kuala Lumpur, Singapore, Hong Kong, and other major East-Asian megalopolises.
The 3lite London Edge
In 3lite’s “In Focus” blog-chain, we will be going into an in-depth analysis of some common project and cultural challenges in large and complex projects, with the backbone of our review being major developments in London financed through FDI. In the future, we will cover additional topics that will highlight some of the challenges that have appeared, and those that have yet to show their face. We will discuss key developments in the London area, cross-cultural challenges in managing people (and expectations), opportunities in engaging the international supply chain and the major risks in managing landmark high-rise projects. Large and complex property developments are 3lite’s bread and butter. We are experts at making sure that large developments are delivered effectively and on time. Contact us via our website at www.3lite.co to learn more.
By: Milan Jankovic