Asian investors have been notable players in the UK real estate market, so what effect will Brexit have? This article examines some of the cross-border issues that arise.

Singapore and the UK have several features in common: they share a common law system and policymakers have sought to curb price rises in some forms of residential property in recent years. Results of the latter have been mixed. And Asian investors have been among the buyers of London’s real estate market. With the recent Brexit vote in the UK adding to uncertainties, if only in the short run, how does investment into the UK property market look from Singapore? 

Elliot Vure, sales manager Asia at Select Property Group, considers the issues. The editors of this publication are pleased to share these insights with readers and invite responses. As always, the editors do not necessarily share the views of guest contributors.

The UK has long been an investment destination for Asian real estate investors. According to Knight Frank, between 2013 and 2015, Asian investment into the UK property market was measured at around $22.2 billion. Furthermore, investors from Singapore have been the largest Asian investor group, accounting for almost a third of that total investment, showing the clear appetite for British property investments in the Lion City.

However, investor confidence has been affected by recent political developments in the UK. Although markets reacted positively to increased stability at the top of the Conservative Party - with prime minister Theresa May and her appointed cabinet - the majority of the investment community is taking a “wait and see” approach. Yet, as the dust settles, it is clear that for the savvy Singaporean investors, the UK can still offer an exciting opportunity, more so now thanks to the much weakened pound. 

Singapore property market 

The domestic Singapore property market has recently been associated with so-called “property cooling measures”. Put in place by the government in 2009, these measures are designed to slow the market from reaching what some feared would be an "overheating" phase. They also helped to regulate the country’s banking system to ensure sustainable property lending, and give priority to first-time home buyers. It is a topic that has remained fixed on the Singapore government’s agenda for some time and is being continually monitored by the wider investment community.

While Singapore property prices saw a 60 per cent surge between 2009 and 2013, reports by local lenders indicate that the property cooling measures have now taken effect. Since reaching a peak in 2013, there has been an 8 per cent decline in the property price index since 2013.

However, according to analysts, prices are expected to drop by a further 15 per cent from their current levels before the government intends to review its cooling measures. This predicted price trajectory would go some way to explaining why the Singapore government pledged not to change the cooling measures in its 2016 annual budget announcement. 

To underline the continuing cooling trend, the Urban Redevelopment Authority announced that sales of new private homes fell 11.6 per cent in May this year, compared to the level seen in March 2015. However, it is not just new private homes but most property segments in the Singapore market that are facing challenges on multiple fronts. These now range from sluggish global growth, increased supply of units and weak domestic demand, not to mention those heavily publicised cooling measures.

One of the key challenges remains to understand who is the most heavily affected by these measures. Recent reports suggest that local buy-to-let investors are facing low tenant demand for rentals. This results in landlords facing a shortfall in income, making meeting their monthly mortgage payments a stretch. The picture for Singapore landlords looks particularly challenging for the immediate future.

Brexit - a portmanteau of “British Exit” - refers to the referendum held on 23 June 2016 by British voters to exit the European Union. In the early morning of 24 June, once it was clear that the UK would no longer be part of the EU, the UK’s money markets immediately reacted. The pound fell by 10 per cent against the dollar and the FTSE 100 index of shares fell by 8.4 per cent within the first few minutes of trading. 

In the few weeks following the seismic vote, May, the new prime minister, appointed a cabinet that blended “Brexiters” and “remainers”. The swift and decisive appointments provided markets a sense of calm, though the investment community locally and internationally still remains cautious. However, that seems to be the case across different property markets globally. 

For example, property investors in some of Asia’s most popular real estate sectors continue to remain guarded in the wake of the downward trend for prices and indeed yield. In Singapore, government-imposed cooling measures have contributed to a 10 per cent fall in rental yields since 2013, while prices have been forecast to drop by as much as 24 per cent in 2016.

The Asian region’s other legendary property market, Hong Kong, is also following a similar trajectory. Analysts believe average values could fall by as much as 20 per cent by the end of 2017, which, as reported in June 2016, has contributed to an 11 per cent year-on-year slide in property sales in the country. The US dollar-pegged Hong Kong dollar could also feel the impact of a potential Fed rate hike later this year.

However, recent global events could prove manna from heaven for some. While investors could certainly wait for local property prices to bottom out, more opportunistic investors are now looking into British real estate very seriously. One of the main drivers of this interest is a much weakened pound.

Impact on Singapore investors
It might seem to be a gloomy scene for Singapore investors, buffeted by economic headwinds, geopolitical uncertainty and volatile currency markets globally. 

Locally, Singapore’s third-largest lender, United Overseas Bank, recently announced the suspension of its loans programme for London properties, citing uncertainties created by the referendum result. UOB is especially concerned about investment in London property, which means that smart investors are looking at alternative cities to deliver much-sought-after value.

However, the golden rule of property investment has always been “location, location, location”. 

Asian investors, in general, have always had an affinity for British real estate thanks to its track record of growing returns for investors. But many have come to discover that London no longer stacks up from an investment perspective. The property boom of the mid-1990s has made London increasingly unaffordable, and while the rapid acceleration of property values is slowing, so are monthly gains and demand.

More attuned investors have already identified a new investment location within the UK: Manchester, a city that is on the verge of its own new growth cycle. This city, famous for its music, football teams and industrial innovation, is also home to one of the UK’s most underserved residential property markets. A significant amount of investment is also being made into the city’s transport, education and commerce, and investors are already securing assets to ensure the highest returns ahead of the predicted growth curve for the city’s property market.

All in all, in an increasingly intricate property investment landscape, the most important step for investors would be to invest time in research to better understand where future growth will likely spring from. The era of stable growth and yield is probably over for the short term. However, if investors look closely, there are still valuable investments to be made in the UK and beyond. The pound has weakened to a low unseen in decades, and this window of opportunity will perhaps be the greatest it will ever be for investors. While it is still a volatile currency environment, UK properties have just become 12 per cent more affordable in international terms, and those who understand will be grabbing the opportunity while others are fearful.