What does Brexit mean for Australian property market?

On June 24, 2016, the UK took a referendum on their membership of the European Union (EU). The decision came as a shocker to the countries they are associated with. Here, we are exploring the possible impact on Australian property market…

Markets and businesses around the world are preparing for a sharp volatility as UK decided to leave the European Union. To leave the EU, UK has to invoke an agreement called Article 50 of the Lisbon Treaty which allows the two sides about two years to agree on the terms of the split. Britain’s Prime Minister Theresa May has confirmed this appeal will be finalised by end of March 2017 and so UK could be expected to have left by mid-2019 depending on the exact date the parties will have agreed upon. The ongoing transition period brings about uncertainties to UK and EU at large. Australia on the other hand is expected to stay relatively stable. This stability could attract more global capital investors to seek growth opportunities in Australia. Australia has low sovereign risk and a very stable economic growth for which it is regarded as a safe haven worldwide. The impact of Brexit would likely be positive for Australia’s property sector and this article will explore the possible pros and cons of this separation.

WHAT DOES BREXIT MEAN FOR AUSTRALIA?

Although the exit is certain to happen, Europe and Britain still needs to establish new terms and all parties need to gauge how the exit terms would affect them. London is one of the primary destinations for property buyers, especially to Asian buyers. However, the uncertainties on the impact of the Brexit may direct investors to other destinations. Australia already attracts a good portion of the global capital primarily in commercial property and is expected to gain more from the UK-EU split-up. According to realestate.com.au, Australia now looks more appealing than Europe.
The UK is Australia’s 7th largest trading partner. Other experts anticipate that the consequence of Brexit will be industry specific and may not affect macro economy. For example, Australia’s wine exporting industry would be affected as Britain is the top exporter of Australian wine by volume. After the exit, Britain may choose to impose new technical rules for imported wines and it might involve extra cost for Australian wine exporters. We may also see a flight to property market because of share market volatility. In this scenario, more people would likely avoid stocks and lean toward real estate market.

PREDICTION EFFECTS

Short to medium term
Real estate is not very volatile or liquid as equity, currency and commodity market. That means the reaction and the effect of Brexit won’t be very spontaneous. Buyer inquiry volumes and property appraisal numbers will predict if the market has been effected. Brexit surely adds sovereign risk to inward investment in the UK and it will influence the capital amount, the types of investors and level of return. Nonetheless it makes Australian property market more attractive for large foreign developers and high net worth private buyers.
Commercial and residential real estate will surely see a rise in demand from domestic investors and owners of self-managed super funds. Buyers like them will start evaluating their investment portfolios and would choose real estate as the safest asset class.

Long term
The confusion and uncertainties surrounding Brexit could bring a slump to the global economy. Some economists speculate the UK might face a recession, EU may face slower economic growth and it could have adverse effect on the trade with the region. If the slowdown comes harder than expected, world economy has to cut interest rates to stimulate growth.

PROS AND CONS FOR PROPERTY MARKET

Pros

• Investors have started looking for ways to exit the volatile equity markets and move into safer economic environments
• Australia could be perceived as one of the safest alternatives for the investors. It is less risky, stable and secure than any other place.
• Owners of SMSF portfolio holders will shift their portfolios from equities into commercial & residential property
• More investors will start looking outside the EU and the UK and off-the-plan sales will increase from offshore buyers

Cons

• It may result in global economic downturn and it may hit employment and Australian economy as well
• There will be devaluation of the EU and British Pound and it would turn Europe and Britain into havens for buyers
• New projects under construction that have a lot of foreign buyers would fall under settlement risk
• Development of new residential developments would slow down as investors would find it risky to buy an ongoing project

For Australia, the effect of Brexit could be mixed.  Asian investors would see it as the next best market to invest. This increase in competition in property market may drive property prices higher. As a result, domestic buyers will face stiff competition against the foreign buyers. The investors may hold off investing anywhere until the market becomes stable. Despite all the predictions, Australia will surely become a more attractive, less risky and secure destination for global capital.