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London address still desirable for Gulf investors despite Brexit

LONDON // Markets hate uncertainty. But for the brave, uncertain markets are a golden opportunity.

Two weeks after the UK’s historic vote to cut ties with the EU, there are quite a few overseas investors who are considering that now might be an ideal time to buy that sought-after second home in London or to add to the portfolio of property they have already been accumulating.

Admittedly, Ramadan and Eid are traditionally a quiet time for the UK property agents based in the Middle East, as people spend more time with their family but Will McKintosh, the joint head of residential at JLL’s Dubai office, thinks inquiries will accelerate after the holiday.

“We have had a number of calls from people who are asking if it might be an opportunity.” At the same time, he says, demand so far is stronger from Asia than from GCC countries.

Investors who have been observing from the sideline – neither rushing to buy or sell – are expected to make their move.

In London, there has already been a rush back into the market, according to at least one estate agency.

Douglas and Gordon, the property agency that covers the most expensive postcodes, has had an 11 per cent increase in sales in its first week of post-Brexit trading.

It also reports a surge in interest from dollar buyers from the UAE, among other countries, who are looking at properties priced between £1 million (Dh4.78m) and £2m.

As of yesterday afternoon the pound was at $1.29 on the forex markets, down 13 per cent from its level before the referendum results were unleashed.

UAE investors accounted for more than a fifth of all buy-to-let sales in the UK last year, according to the estate agency Chestertons, and there seems to be little sign of this demand abating, despite the uncertainties caused by the Brexit vote.

Someone who hopes to convince hesitant investors is Naomi Heaton, the chief executive of London Central Portfolio (LCP), which has a fund that invests in one- and two-bedroom properties in prime London.

“There is every reason to anticipate an influx in investors following the unexpected ‘leave’ vote,” she says. “Notwithstanding the referendum, the fundamental attractions of prime central London – Mayfair, Holland Park, Notting Hill, Belgravia, Chelsea and Westminster – as a centre of culture, excellence and education and as a beacon of democracy with absolute rule of law and unequivocal title to property are still very much in place.”

LCP launched its first fund in 2009 when experts were predicting that the market would slump by 30 per cent. Ms Heaton’s fund has returned 13.5 per cent year-on-year.

“With a loose parallel to the global financial crisis when prime central London showed enormous resilience, the current weak sterling and low interest rates will be a major draw for investors,” Ms Heaton says.

Dana Salbak, who works for Knight Frank in Dubai, also says that investors are not rushing into anything.

“We’ve had a lot of calls, but investors are adopting a ‘wait-and-see’ approach. We expect that some of these inquiries will materialise in the medium-to-long term,” she says.

The interest from GCC investors in London had continued during the pre-referendum period, although investors have been more wary. One trend that may emerge because of the Brexit uncertainty is for GCC investors to look outside the golden postcodes – Mayfair, Chelsea, Belgravia, Holland Park, Notting Hill – to find value. Knight Frank has predicted a 26.4 per cent growth between now and 2020 in east London with yields of about 4 per cent a year, making a foray outside Mayfair a very attractive proposition. But that prediction was predicated on a remain vote winning.

Many of the wealthier GCC families have been educated in the UK or may be in the middle of sending their children to school here, so they are often buying homes for their own use – as well as investments. Increasingly, Middle Eastern families have also been considering commercial real estate assets.

Richard Divall, the head of cross-border capital markets at Colliers International, is also seeing investors take notice, but not yet rush in. “Generally the world has paused. The core buyers are taking a breath, they want to get a bit more certainty before addressing the market,” he says.

In the commercial real estate world, deals last week were put on ice by some of the major investors in the UK. One of the biggest now under review is Canada’s Oxford Properties, which was set to buy Mulberry’s flagship store on New Bond Street in London’s West End from Aberdeen Asset Management.

The German fund Union had also been set to buy Hines’ Cannon Place in the City of London for about £465m, in an off-market deal. Union has now pulled the plug, while another German fund, KanAm, is thought to have withdrawn from the £190m acquisition of 1 Wood Street, also in the City.

Mr Divall says: “At this point, Middle East and Asian investors look like they have a real advantage [because of the weakness of the pound]. We may immediately have lots of buyers, but who is going to sell?

“This time is different from the 2008 crisis because there has been more sensible lending and there is a lot more equity in transactions. There won’t be many forced sellers.” The only people who might be eager to sell, says Mr Divall, are some closed-end funds that end next year or particular buyers, such as Malaysian investors, who have timed the cycle very well and are already sitting on a healthy profit.

At the time of writing, however, no fewer than three large open-ended property funds had suspended trading after investors rushed to withdraw funds as a result of the referendum vote. Standard Life suspended trading on Monday, followed by Aviva and M&G on Tuesday. Mike Prew, an analyst at Jeffries, says he expects more funds to halt trading and for the sell-off to spread to quoted property companies.

Laith Khalaf, a senior analyst at Hargreaves Lansdown, says: “Property funds are clearly under pressure as a result of the Brexit vote and we could now see a new wave of investors being unable to liquidate their property funds quickly, which we last witnessed during the financial crisis.”

Underlying the presumption that commercial real estate assets may fall in price is the threat that many big banks and institutions will be forced to lay off staff and may even relocate some of their trading floors to European cities, such as Dublin, Paris and Frankfurt.

Mr Divall points out that it has actually been technology and media businesses that have been driving the performance of the City lettings market in the past 18 months. However, if technology companies suddenly decide they no longer gain an advantage by being in London, that source of demand will weaken.

Savvy investors are likely to pause over the summer, Mr Divall says. By October, some of the UK’s leading companies will have released post-Brexit trading data. It will be easier to gauge how the corporate world is faring by then, he says.

“Ultimately, though, you can’t underestimate London as a safe haven. Especially, in this world of ultra-low interest rates, people need somewhere safe to put their money,” Mr Divall adds.