Brexit not D-Day BY THEAN LEE CHENG

by **Cals** Mon 20 Jun 2016, 02:07

Saturday, 18 June 2016

Brexit not D-Day

BY THEAN LEE CHENG

Malaysian developers, institutions and the well-to-do are keen stakeholders in Britain’s market. Some have asked their agents the effect of Britain leaving the European Union. Maybe just a blip, not a trend.
WITH Britain’s referendum to leave or remain in the European Union (EU) just five days away, some Malaysians will be watching in anticipation the outcome of The Vote next Thursday.
They are Malaysians to the core, but as the saying goes, the heart is where the treasure is. Some of that treasure is sitting on British soil.
And they may have come across some rather pessimistic news from the British government about the economic fallout if Britain does vote to leave the EU.

To give a bit of perspective, after the 2008 global financial crisis, some parts of London suffered price drops of as much as 30%. The sterling pound also fell. It was a double buy. Malaysian institutional investors, developers and ordinary folk alike took the opportunity to enter the market.
The June 23 vote to leave the EU – or Brexit – is expected to impact every facade of British life and that includes the property sector.

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“There is a bit of uncertainty, which is normal. But those who have bought are there for the long term.” – Jazmine Goh

JLL Property Services (M) Sdn Bhd head of international residential Jazmine Goh says her clients have been asking about the effect if the “Leave” vote comes through.
“There is a bit of uncertainty, which is normal. But those who have bought are there for the long term.”
Goh was previously from Henry Butcher International. The agency was aggressively promoting properties from about £200,000 onwards on a near-weekly basis in five-star hotels in early 2009. Other agencies entered the scene subsequently.
“If they leave, there may be a drop in price. I cannot say by how much. It depends on what happens in other parts of the world,” Goh says in a phone interview.
Malaysians are latecomers to the international property arena. Singaporeans and Hong Kong buyers have been ahead since the 1970s/80s.
DTZ Nawawi Tie Leung Sdn Bhd managing director Eddy Wong says if Britain remains, it will be status quo with a rise in the sterling post-June 23.
“Investors do not like uncertainties. Brexit is unprecedented and unpredictable. If they leave, it will be a shock, pushing the country into recession,” Wong says.
DTZ has not been active in promoting international properties, he says, but when it does, it advises clients to minimise their exposure to currency risk.
“Therefore, you borrow in sterling up to 60% or 70% of the property price, or as much as you possibly can. If your loan is in sterling, you are not exposed to the risk. Whether the exchange rate moves up or down, it moves in tandem with the property price. Your 30% equity, in ringgit, is your exposure,” he says. This is assuming the rental will be enough to pay for the mortgage payments and the absence of other risk factors.
With a sale, he gets the proceeds in sterling and he pays for the loan in sterling.
If one were to examine the 10-year period between 2004 and 2014, the British pound at about RM7 would seem “expensive” in 2004 but “cheap” at RM4.70 in 2013. For a good part of 2014 and until the first four months of 2015, it hovered around RM5.50 before embarking on a steady climb to about RM6.50 in August 2015. It see-sawed this year.
Wong also highlights a study done by the British Treasury which highlighted two scenarios - a shock scenario and a severe shock scenario with house prices falling 10% and 18%, respectively.
It concluded that a vote to leave would result in a marked deterioration in economic prosperity and security.
Khong & Jaafar group managing director Elvin Fernandez says everything will be affected. “How and to what degree is still left to be seen (in the event the Leave camp wins),” he says.
“London is one of the most foremost property destinations. Malaysian developers who have gone over there will be affected. Will Singapore benefit from the fallout? They may be,” says Fernandez.
Singapore-based CBRE executive director (international capital markets – Asia) Marc Giuffrida says there is talk that Paris may step up.
“If you consider London, New York and Tokyo, each of them are 20 million sq m markets – they are massive. You cannot move them overnight.
“Leaving the EU will not change London’s fundamentals like culture, education, business and politics. The impact of the referendum is more on the lead-up to it and not what happens afterward. The biggest impact is the hiatus – clients not making any decisions until it is over,” says Giuffrida.
In a phone call to property consultancy Savills’ David Garland in London on Wednesday, the commercial research analyst says transactions dropped for the first quarter of 2016 compared to a year ago in all segments.
“This was due to the run-up to the referendum,” he says.
As for residential properties specifically, a month-by-month comparison shows a certain amount of volatility. Seasonally adjusted transactions dipped to 84,280 in April 2016 from 153,700 in March and 109,580 in February 2016, the Financing Property 2016 report says.
It is the uncertainty as a result of June 23, but this does not mean there is a loss of investor confidence, he says.
“Investors just don’t like uncertainty.”
In the last 10 days or so, the vote to leave seems to be crystallising, setting a host of chain reactions in corporate and political circles around the world, with the underlying message of economic Armageddon.
Says Garland: “The impact is over-stated.
“People buy into London not because it is part of the EU but because it is London.”
An April Savills research report for commercial property says “generally, our non-domestic investor clients seem to be the most relaxed about the likely direction of the referendum, with most commenting that they have never invested in the UK because it is part of the EU, but because of the comparative performance of the assets and the defensive nature of the UK lease structure”.
The report says the referendum is not the main reason for the current slowdown. Instead, the investment climate is past its peak and this is definitely so in some areas.

“We have learnt from past mistakes (for example, over-lending, a poor due diligence process) and there are few signs that we are making them again (yet),” the report says