Daniel Lees, Associate Director | Research
The referendum on whether Britain should leave the European Union (Brexit) draws near, with results likely to be announced on Friday. In the days leading up to the result, market uncertainty has risen, and investor positions are erring on the side of caution with a move towards more ‘safe-haven’ investments.
Australian real estate has long held appeal with foreign investors due to positive long-term returns, political stability and financial system transparency, particularly within the south eastern states.
Many investors now have Australia as a ‘must have exposure’ and a stable platform to invest into the wider Asia Pacific region. Increasingly, Australia is being regarded globally as a safe-haven option for real estate investment.
If there is a certain level of stability that is generated from our real estate sector, could ‘Brexit’ enhance the appeal of Australian real estate investment from offshore markets as cautiousness rises in places like London?
Over the past two years, global investors have favoured yield over more cyclical or volatile asset classes which is a reflection of the consensus expectation of a ‘lower for longer’ interest rate environment. Brexit would potentially exacerbate this dynamic.
We have already witnessed this starting to occur, with 10 year UK bond yields falling further than European counterparts over the past month, and spot gold prices rallying through June. Meanwhile the British Pound has weakened, equity markets have been sold off and other parts of the commodity complex (ex-gold) have softened.
But what about property investment, which is generally considered to correlate with economic and financial cycles?
Direct property investment, while somewhat sensitive to real economic conditions, is more sensitive to financial economic conditions than other sectors - especially if you consider property to be a stand-alone asset class. Investment decisions take into consideration a wide range of financial drivers like the regulatory environment, policy transparency and fluctuations in sentiment. Following this school of thought, it’s possible that a Brexit would have a significant impact on sentiment and the direct property investment market.
Our 2016 global investor survey placed London as the preferred destination for offshore property market investment followed closely by Melbourne and Sydney. If a UK vote to leave the European Union was passed on June 23rd, this would most likely have a negative impact on business and investor confidence, and boost demand for safe havens further.
Uncertainty surrounding the future of trade agreements would presumably take a significant amount of time to work through, fundamentally altering the transparency that property owners find crucial to making investment decisions. It could temporarily tarnish the appeal of the London property market with global investors, improving the outlook for other major capital cities. If the results of our global investor survey are followed, Melbourne and Sydney are well placed to benefit from capital flows, should the London commercial property market lose its lustre.
Of course, investors could take a far longer term outlook, keep calm and carry on in the expectation that the UK will be prosperous outside of the EU. It is considered one of the largest global economies behind the US, China, Japan and Germany. Prospects for the UK outside of the EU would be far different to those faced by the likes of Greece during the crisis of 2011-12 when economic calamity was high on the list of possibilities.
Britain’s tax laws, heavily skewed toward supporting offshore investment together with its status as one of the largest financial hubs in the world, suggests that downside impacts on investment decision-making may be limited. This could mean that any impact on direct property investment behaviour would also be limited.
Given these outcomes, Australian real estate investment could benefit either which way the referendum results fall on Thursday.