Since the Brexit vote last year sterling has been under significant pressure and while it has bounced a little over the last couple of weeks, overseas investors are still circa 20% better off when buying UK property when converting to sterling. At this moment in time there is no guarantee that a Brexit deal will be agreed and the UK could effectively leave the European Union and revert to World Trade Organisation tariffs. This is unlikely but do not rule it out!
Where does this leave overseas buyers?
On the surface there could be significant more downside for sterling in the short to medium term as talks continue to stall. However, the spectre of inflation should not be ignored because exchange rates are causing a significant increase in the cost of in imports to the UK.
Only a year ago inflation was around 0.9% in the UK and only last week we learned it had increased to 3% which has already prompted the Bank of England to suggest a base rate rise could be on the cards. While investors may be a little concerned that UK base rates could rise, it is perhaps overseas investors who should reassess the situation as soon as possible?
Rising interest rates
An increase in interest rates will make sterling look more attractive to currency traders and, Brexit aside, an increase in rates will improve the exchange rate. This will then reduce the “Brexit premium” which overseas property buyers are benefiting from when looking to buy UK assets. We’re not suggesting sterling will recover fully to last year’s exchange rates, and indeed Brexit could yet force it significantly lower, but a short-term increase in UK base rates will certainly make sterling more attractive.
This comes at a time when domestic investment in residential and business property is starting to slow. As Brexit talks drag on so businesses are becoming more concerned about their immediate future hence postponing any significant investment. It is unlikely we will see many UK businesses announce large expansion plans in the short to medium term while there is so much uncertainty. If, as expected, UK base rates do increase then this will have a gradual impact upon UK mortgage rates.
Is it time for overseas investors to act?
Amidst all the doom and gloom surrounding the UK economy, UK property market and prospects for the UK as a whole, perhaps the cloud of depression is just a little over baked. If you read the biased press you would be forgiven for assuming that the European Union had nothing to lose with these talks. The EU economy will continue to grow and the UK will just be cast aside – however, it is not that easy!
While there is talk of a no deal conclusion there is also no doubt that the “clever money” is still on an eventual compromise. As soon as the clouds begin to clear above the UK economy this should feed into the exchange rate and hopefully pump some life and confidence back into the country. Even the merest indication of positive news could see the UK currency start to recover and change momentum. On that basis, perhaps it is time for overseas investors to look again at the UK property market?