Since the UK government floated the idea of a referendum on membership of the European Union there has been growing concern in investment markets. Over the last few weeks we have seen a significant fall in sterling exchange rates with the dollar rate dipping to under 1.40 earlier this week. The ongoing pressure on sterling plays into the hands of many overseas investors who are now able to exchange their currency on extremely favourable terms. However, will the currency gains be enough to offset European referendum concerns?
Currency gains
When you bear in mind the significant fall against the dollar and to a lesser extent against the euro plays into the hands of overseas investors it would be no surprise to see more funds flowing to the UK in the short term. If, as the majority of people still expect, the UK referendum on membership of the European Union is in favour of remaining part of the European Union then those investing at current rates will improve their returns in local currency if sterling recovers.
There is therefore the potential for overseas investors to benefit on the way in, benefit from uncertainty removed from the UK economy and also from any future recovery in sterling IF the referendum is in favour of remaining in the European Union. The uncertainty which would surround an exit vote is exactly that, nobody really has any idea how this would impact the UK economy in the short, medium and longer term at least until trade agreements are in place.
Support for UK property
The majority of overseas investment in the UK property market is centred round London and other luxurious areas of the country. There are other hotspots around the country which do attract some overseas investment but the majority has historically been in the London property market. However, with less than 100 days to the referendum the UK property market could do with all of the support available.
The short term outlook for the property market is uncertain with buy to let investor supporting the sector prior to the April tax increase. What can we expect after the new buy to let surcharge is implemented? Will overseas investors pick up the slack? Will the UK still be a member of the European Union this time next year? Will Scotland still be a part of the Union?
Uncertainty prevails
There are so many elements of uncertainty regarding the UK referendum on membership of the European Union that it is no surprise to learn some investors have decided to sit on the sidelines. Indeed the Scottish government may well also pay the price with an announcement that the SNP will be pushing for a new referendum on independence starting in the summer of 2016. You would have hoped they learned their lesson the last time, when property investment stalled in light of the prolonged previous referendum, but we appear to be on the verge of yet another period of uncertainty.
Between the UK government, Scottish government, the European Union and the in/out camps there is much to think about for investors looking at the UK property market.