While there has been much talk about the UK property market benefiting from a weakened sterling, what about UK investors who are seeking to buy overseas property? Since a recent peak of €1.43 euros to the pound in November 2015 the rate has fallen to €1.11 which is a reduction of 22%. The situation is even worse with the dollar having fallen from a high of $1.71 to the pound in July 2014 to just $1.26, a fall of 25%. So, while the UK property market may benefit from overseas investment, are UK investors now locked out of overseas markets?
Starting from a weak position
There are a number of problems facing UK investors looking to diversify into overseas property markets. If they were to exchange sterling into either euros or dollars today and purchase overseas property, would they be selling sterling at the bottom and buying into the euro/dollar at the top? What do we mean?
As a consequence of Brexit we have seen a significant reduction in the value of sterling on overseas money exchanges. However, talk of a second referendum is growing stronger and with a no deal more likely each day what would happen if Brexit was cancelled? Nobody is suggesting that the value of sterling would bounce back to rates prior to the first Brexit referendum but surely there would be at least a partial recovery?
Locked into the UK market
Any property fund manager increasing their UK customer’s exposure to overseas markets at current exchange rates would literally be on a hiding to nothing. If the currency was to fall further then they may even be able to bank a small profit in the short term. However, if sterling was to recover in the event of a much expected second referendum might this leave ambitious property fund managers with egg on their faces?
So, you could argue that weak sterling is reducing the amount of funds leaving the UK for overseas property. As there is minimal interest on cash we can safely assume that much of this additional funding will find its way into the UK property market at some point. Even though weak sterling has yet to have a major impact on overseas investment in the UK property market, surely this must come at some point?
Technical factors coming into play
If the UK was to remain within the European Union after a second referendum would there be an argument for converting to the euro? The short to medium term timing would likely be wrong due to the current exchange rate but what about a long-term commitment? This would then lead to UK property investors not having to worry about exchange rates when investing in parts of Europe that have adopted the euro. Is this a sensible argument?
There is so much uncertainty, concern and confusion regarding the UK property market today that it is difficult to know what direction it will take. There are many economic as well as technical factors to take into consideration. Could the UK really have a long-term future as part of the European Union? Overturning Brexit could prompt a significant backlash from voters. The role of UK Prime Minister today is certainly not an easy one.