The impact of Brexit on overseas property investment
- Global real estate reaches value of $217 trillion (Savills)
- Brexit debate impacts doubly on overseas property investment (easyMarkets)
- Sterling down 20% against its high of 1.7159 in July 2014
With the referendum on Britain’s membership of the EU now looming, the financial impact of the uncertainty is already being felt. From the value of the pound to the state of the stock market, the Brexit debate is posing challenges for the UK.
One area with the potential to suffer particularly from the uncertainty of the Brexit question is overseas property investment. Nikolas Xenofontos, Director of Risk Management at leading online trading services provider easyMarkets, observes,
“Overseas property investment is likely to suffer doubly as a result of the discussions around Britain’s EU membership. The decreased value of the pound means that buyers can get less for their money, meaning some will hold off from an overseas property purchase until sterling recovers. Meanwhile others will pause until the outcome of the referendum is known. Buying a holiday home in Europe that you plan to retire to one day doesn’t have quite the same appeal when you don’t know whether you’ll still have the freedom to move to that country when the time to collect your pension comes.”
The referendum has already hurt sterling, with the pound falling to a seven-year low against the US dollar on 21 February. In fact, the pound lost 1% against all 16 of its major trading peers, while the pound-to-dollar exchange rate reduced by more than 5% in the first two months of 2016 and is down a massive 20% since its high of 1.7159 in July 2014.
Should Britain actually leave the EU, Swiss bank UBS has projected that the move might drive the pound down to parity with the euro. This would have a major impact on the number of Brits buying property overseas, with many opting to wait until the pound recovers, which few analysts are predicting would happen anytime soon.
One approach to overcoming the lingering uncertainty is to hedge against undesirable movements in exchange rates by using options. easyMarket’s Nikolas explains,
“Say you’ve arranged to buy an apartment in Spain that costs €100,000 and you agreed to pay for it in 4 weeks’ time, using your savings of £78,600. This means that you need the EUR/GBP exchange rate to be below 0.7860 in order to insure the full €100,000 for the purchase. If for example the exchange rate rises to 0.9000 in 4 weeks, your £78,600 will be worth only €87,000.
“By purchasing a ‘call option’ with a four-week duration and strike rate of 0.7860 you can ensure that if the EUR/GBP exchange rate in four weeks is above 0.7860, you will be able to cover the deficit with the profit made on the call option. In case the exchange rate after four weeks is lower than 0.7860, and hence the current market rate is better for you, you will let your call option expire without exercising it as your savings will be enough to cover the property cost in euros. You will only lose the small premium you paid for the option/hedge but profit from a better exchange rate.”
Of course the global property market is about much more than just UK buyers. According to Savills, residential real estate around the world has a value of $162 trillion, including $54 trillion of investable real estate and $108 trillion of non-investable. The firm calculated that global property value in 2015 amounted to 2.7 times global GDP, observing in its Around the World in Dollars and Cents report that property accounted for around 60% of all mainstream global assets.
While a Brexit would not impact massively on such large scale figures, the local impact on the overseas property market – particularly in popular locations such as Spain and France – would certainly be felt. Indeed, the ongoing Brexit debate means that the market is already facing a great deal more uncertainty than it was just a few short weeks ago.
For further details visit www.easymarkets.com, email pr@easymarkets.com or call +44 203 1500 748
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