Asia Pacific Investors seek opportunities post Brexit
By Michael Cole, July 2016
As the UK and the European Union remain mired in uncertainty following Brexit, potential real estate investors in Asia Pacific are beginning to explore opportunities presented by currency arbitrage and further monetary easing from central banks.
According to JLL’s “EU Referendum – Making sense of Brexit – 5 days on,” the London office occupier demand will be subdued in the near term and perceived threats to the financial services sector in London may reduce high-end domestic residential demand. However, a devalued sterling opens up a large buying opportunity, notably from the dollar-pegged currencies of the Middle East and in Asia, Paradoxically, Prime London may be the one housing market in the UK to see upward pressure in price, as a result of the referendum decision, says the report.
The British Pound has fallen to a 31-year low of $1.30 on July 6 compared with $1.49 on June 23, the day before the Brexit referendum. Meanwhile the yen appreciated, while the USD-pegged Hong Kong dollar and the Singapore dollar, which is managed against a basket of currencies, rose in tandem with gains in the greenback. In Hong Kong, property stocks climbed amid perceptions that they were undervalued and the Nikkei Stock Average rebounded following an initial slump.
Singapore, China Buyers
Despite the downgrading of UK’s AAA rating, Asian buyers aren’t deterred. In Singapore, JLL has seen “more queries from Singapore clients looking to purchase,” says Dr Chua Yang Liang, Head of Research for Southeast Asia. “The motivation is to take advantage of the currency arbitrage and correction in house pricing although there are some who are “waiting” on the sideline for more market stability before entering,” he added.
In Hong Kong, there are also signs that investors are seeking opportunities in UK. “From an overseas investor’s perspective, the currency fluctuations could create great opportunity for overseas cash rich investors,” says Mark Elliott, associate director of International Residential Property Services at JLL in Hong Kong. Mainland Chinese investors have been reported to be seeking bargains after the pound plunged, although authorities are keeping checks to stem illegal capital outflows.
While sentiment in the residential market is somewhat positive, the mood in the commercial sector remains cautious. In the local Asia Pacific markets,, the impact of Brexit is mixed. “Some British and European firms may be more circumspect about investing or expanding in Asia Pacific while their core businesses face domestic headwinds, however, any negative impact will be mitigated by the fact that economic growth in the region is based largely on domestic demand,” says Dr Megan Walters, Head of Asia Pacific Capital Market Research.
The direct impact on China from Brexit is expected to be small as external demand is no longer a key driver of China’s growth, although a stronger USD puts depreciation pressure on the CNY, which will again test the People’s Bank of China (PBOC)’s management of the exchange rate as the government seeks a stable currency ahead of its official entry into the International Monetary Fund’s reserve basket on October 1, according to Dr Walters.
David Rees, Head of Research JLL Australia, says: “Offshore investors have accounted for a growing proportion of transactions in commercial and residential real estate in recent years. The major source of this capital has been the Asia Pacific region. It seems to be no reason why the Brexit referendum outcome should alter this in the near future.”
The direct impact on the domestic real estate market in Japan is likely to be muted, says Takeshi Akagi, head of JLL Research in Japan. “Domestic investors are the current drivers and their appetite for investment looks unlikely to waver significantly. In terms of investment opportunities in the actual market, the reality is that these remain limited due to an ongoing scarcity of asset.”
While Brexit clouded the global growth outlook, Akagi says investors should not rule out the possibility of new economic stimulus measures by the Japan government and the Bank of Japan. In South Korea, President Park Geun-hye was reportedly planning a $17 billion stimulus package.
The Federal Reserve has said that it was “prepared to provide dollar liquidity through its existing swap lines with central banks as necessary to address pressures in global funding markets, which could have adverse implications for the U.S. economy.” The Bank of England and the European Central Bank have made similar statements.
Wall Street economists have also changed their predictions for U.S. rate hikes, projecting that the Fed will not raise rates until later this year. This generally will bode well for real estate markets.
As the yen’s status as a safe-haven currency led to its appreciation against the dollar, Akagi’s view is that amid economic uncertainty over Europe, Japan’s relative advantage as an investment destination will increase. “It is likely that Asian investment, which had been previously been targeting Europe, could seek to park their funds in Japanese real estate,” he says.
While some funds may be seeking to exit the UK, it is important to note that the healthy fundamentals that existed before the turbulence will help to limit the downside, according to JLL.
“While negotiation of Britain’s new arrangements with the EU will take time to resolve, the fundamental attractions of the UK market – transparency, liquidity and a familiar legal and regulatory environment – will remain. Obviously, though, we will need to monitor developments closely over the next few months,” says Rees.
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