Real estate, alternative real assets and other diversions

London property faces a bear market in 2018 Why the UK is heading for a period of stagflation

The Macro View

Brown bear in forest

Prime London home prices (Mayfair, Kensington, Belgravia, Chelsea) are now down 20% from their pre-Brexit peaks. Theresa May’s general election gamble and the surprising success of the Labour Party under Jeremy Corbyn has negatively impacted foreign investor sentiment, despite ‘cheap’ sterling exchange rates against the US dollar, euro, Russian rouble and Asian currencies. The fall in sterling has also led to a rise in petrol and food prices in Britain, historically the most inflation-prone economy in Western Europe. This means high street consumer spending falls even as the Bank of England rate hikes bite into floating rate home mortgage costs. The property market, at least at its ultra-luxury, multimillion pound prime central London segment, has priced in hard Brexit, higher populist inspired ‘mansion taxes’ and the end of the offshore buying boom.

It does not surprise me that UK property transactions fell 10% in the last quarter of 2017 even as the dramatic fall in sterling should have attracted frenzied bottom fishing from abroad, as happened after the money market Armageddon of 2008. European buyers are reluctant to buy in central London now that immigration has become a toxic political issue in both Westminster and Brussels. Rental yields have not risen as both rents and values have fallen in unison. The hottest property market in the sceptered isle is not in central London but in the affluent micro-markets of Bristol, Manchester, Leeds and the Kentish coast. King’s Cross has been a transformation hub since Victorian times and is now the biggest property development site in Britain since Canary Wharf in the 1980s.

Now that Mrs May has invoked Article 50 and lost her Conservative MP majority in the June 2017 general election, the grim tone of the negotiations will not excite confidence in homeowners and investors. Every friend I know in the UAE who invests in luxury London flats is negative about the outcome of the Brexit negotiations, given the combative tone of both Eurocrats from Brussels and Eurosceptic Tory backbenchers. The new anger in the London working class after the Grenfell Tower fire tragedy and the emotional toll from the London Bridge/Westminster/Manchester terrorist assaults is also undermining confidence in the prime London market, as is the prospect of new ‘tax the rich’ stamp duty and ‘mansion taxes’. It is entirely possible that the bear market in London luxury housing will only get worse in 2018 and 2019 once the harsh reality of Brexit and successive rate hikes drive the UK economy into recession. The Brexit vote was Britain’s biggest economic own goal since the miners’ strikes bought down successive governments in the 1970s.

As inflation rises, consumer sentiment will plummet across the UK and insane affordability metrics mean the falls in home prices in some micro-markets will be draconian. For instance, I can easily see a 50% fall in the Nine Elms/Battersea new build flats as thousands of Asian and GCC speculators bought crazily expensive, cramped condos with no resale value on leverage from dubious developers (get killed while trying to make a killing in Manhattan on Thames ya habibi!) from Malaysia, China and the Gulf. Battersea/Nine Elms will be a graveyard for leveraged speculators in 2018.

The Macro View

About Matein Khalid

Matein Khalid

Matein Khalid is Chief Investment Officer of Asas Capital in the DIFC; he is responsible for global investment strategy and the development of the multi family office platform. He has worked in Wall Street money centre banks, securities firms and hedge funds in New York, London, Chicago and Geneva. In addition, he has been an advisor for royal investment offices in the Gulf for 8 years. Mr Khalid has four degrees in finance, economics, banking and international relations from the Wharton School, University of Pennsylvania. He is a director at the American College of Dubai and has taught MBA level courses in commercial/investment banking at the American University of Sharjah and British University of Dubai. He writes the Global Investing columns for Khaleej Times, Gulf Business and Oman Economic Review.

Articles by Matein Khalid

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