August 22, 2016

Keith Knutsson Explains How the Brexit Vote Will Affect European Investments

Posted in Integrale Advisors LLC, Keith Knutsson, Real Estate tagged , , , , , at 12:00 pm by Keith Knutsson

Keith Knutsson on Brexit

What is “Brexit” and how will it affect European Investments?

To put it lightly, that’s a very complex question that needs to be considered from every angle. It’s important to look at the factors that led up to the current situation as well as the predictions and forecasts for the future.

It is the merging of the words “Britain” and “exit” to get Brexit, in the same way that Greece’s potential exit from the EU was dubbed Grexit in the past.

The United Kingdom’s attempt to leave the European Union came down to the Brexit vote on June 23, 2016. Results came in at 51.9% in favor to “leave” and 48.1% in favor to “remain.” So, what does that mean for Britain?

Prime Minister Theresa May, who moved into the position after David Cameron resigned, supported the campaign for Britain to stay in the EU, but has since told the people of Britain: “Brexit means Brexit and we’re going to make a success of it.”

According to Keith Knutsson’s research on the subject, Theresa May will have the task of invoking Article 50 of the Lisbon Treaty, which allows a member state to withdraw from the Union in accordance with its own constitutional requirements. Once Article 50 is invoked, the exit negotiation must be completed within two years.

The turmoil that has followed Britain’s winning vote to leave the EU has had a major impact on the real-estate market in the UK. Property market investors are swiftly leaving publicly traded real-estate companies in both Britain and Europe and developers are putting a hold on projects that were already in the works. Many commercial property buyers were already pulling back in caution weeks before the vote.

Germany’s Union Investment Real Estate (the biggest open-ended real estate manager in Germany), pulled out of an investment six weeks before the referendum, which has been described as “speculative.” According to spokesman Fabian Hellbusch, “it was too risky for us, but we haven’t changed our mind about buying core property.”

Keith Knutsson suggested that risky assets will likely remain under pressure as the market tries to digest all the implications of the new status quo. It looks like the desire for safe assets could also continue to put even more downward pressure on interest rates in the US, UK, Germany and Japan, and it’s very possible that countries in the peripheral of the Eurozone will see their spreads widen further. Of all those currencies, though, the pound will be the one that will likely remain under pressure even after most of the initial reaction to the vote has settled down. Simply put, the process of exiting the EU will continue to raise questions over the UK’s ability to grow their exports and bring the current account deficit (that continues to get wider) under even more scrutiny.

This time last year, investors purchased close to €300.7 billion of European property, which was up by €224.5 billion since 2014, but the demand started to shift in the first quarter of 2016, and only €46.9 billion of European commercial property exchanged hands, compared to €74.9 billion in the same period last year.

Prior to the Brexit vote, most European real estate was steadily holding its value. The only exception would be the high-end London condos and mansions. But now there is a widespread decline and office property is at the top of the list.

The Brexit vote has made property sellers panic, making it the opposite of a seller’s market. Although it is too early to know exactly what kind of impact the vote will have on Europe’s overall economy, demand for office space is expected to take a large hit. Financial firms and banks are downsizing or moving staff to other nations in the block, and London is expected to lose close to 75,000 jobs, or 15 percent of the financial industry’s workforce.

According to Howard Archer, chief European economist at research firm HIS Global Insight, prospects within the housing market have also started to deteriorate since the final Brexit vote came in.

Archer says:

● “Housing market activity and prices now look to be at very serious risk of an extended, marked downturn following the U.K.’s vote to leave the EU”

● “This is likely to weigh down markedly on economic activity and consumer confidence, which is not good news for the housing market.”

From what Keith Knutsson was able to determine from the available data, the exit process will be long and tortuous, with a highly uncertain outcome for the UK. However, it is possible that the EU leaders will find a way to accommodate the UK while not forcing them out of the EU completely.

Many people are pulling their homes off of the market until the “dust settles.” There is caution in the air across the board when it comes to the European real estate market. Whether it is commercial, housing, or plans for new projects, everyone in the EU is taking a step back and playing it safe in the wake of the Brexit vote.


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