It was Franklin D Roosevelt that proclaimed that, “The only thing we have to fear is fear itself”, and all these years later in our new post-Brexit world, we would appear to be witnessing the former American President’s words of great wisdom come to pass.
With Standard Life, M & G and Aviva all suspending their property funds due to “a sharp rise in investor redemptions”, it has become clear that there is the real smell of fear amongst many institutional and overseas investors in the ability of UK residential and commercial property to be a solid long term performer.
Should we be surprised? Well no not really, as those investors who view the UK property market with a monopoly mentality were always likely to jump ship early, and at the first sign of a slowdown or realignment in the market. Sadly, it has ever been thus. But will it create problems in the short to medium term? Yes, it undoubtedly will. As Laith Khalaf, Senior Analyst at Hargreaves Lansdown so succinctly put it, “The problems these funds face is that it takes time to sell commercial property to meet the withdrawals, and the cash buffers built up by managers have been eroded by investors heading for the door”.
I guess the acid test as to whether such short termism is warranted, will rather ironically depend on the economic fortunes of the EU once the UK has formally left its collective bosom and truly become an independent nation. You see, there are some that believe that our vote to leave the EU is just the first move in a rather protracted game of chess – as all of the emphasis thus far, both in the media and the financial markets, has been on how the UK will cope without the EU and not, bizarrely, how the EU will cope without the UK?
In essence, it is an inescapable fact that the economies of majority of EU member states (with the notable exception of Germany) have been flat-lining for several years now, largely since the banking crisis of 2008/9. UK withdrawal from the EU will simply serve to weaken their economies further, and place a greater burden on an already stretched German government. Furthermore, it is believed that once our exit takes effect, the value of both the Pound and the Euro will come under further pressure, the crucial difference being that having not previously signed up to the ERM (European Exchange Rate Mechanism) we in the UK will have the ability to devalue our currency and trade our way out of our difficulties – whereas other EU members will not.
Should the above scenario play itself out in time to come, will the UK economy and UK residential/commercial property in particular, look as vulnerable as it would appear to be today? I am no fortune teller, but put simply, we are a small island with a substantial and resourceful population who greatly exceed the housing stock presently available, so we should not all lose sight of such basic fundamentals; as it is difficult to see them changing any time soon.
Lastly, on a more general point – as I am sure that all of you experienced UK property investors realised long ago – the value of an asset is only ever worth less, should you choose to sell it in a volatile market or market down cycle. So if you have invested in UK property in the belief that it is a good long- term investment and are now wondering what you should do? The clue is in the phrase “long- term” which means that you should ignore short term volatility and await “calmer waters”. As a former employer of mine, Stuart Wilson once said, when commenting on the 20% fall in residential property prices in Central London during the recession of 1988-92, “these streets have been the finest in London for over 200 years and shall remain so for my lifetime and beyond, so this blip in the market will be nothing but a distant memory in years to come” and all these years later, how right he turned out to be.
The author of this piece is Peter Nicholls, CEO of ideology consulting. For further information go to www.ideologyconsulting.co.uk