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C

On The Threshold: Some words on the streets of pre-Brexit Britain



By Alessandro Pasetti, 17 September

British households’ confidence about their financial situation held at its highest since 2015 this month, as their concern about inflation eased and they were relaxed about prospects for the year to come, a survey showed on Monday.” – Reuters, 17 September.

“Uncertainty brings opportunity” is one of the most recurring clichés in the investing world, but there’s some truth in it, particularly if you are a real estate investor trained to read the runes.  

Risking everything to risk nothing at all

Let me share with you, briefly, the story of my lovely sister, my business partner in the UK who is in her mid-30s.  

In the immediate aftermath of Brexit in mid-2016, she negotiated a sound property deal worth £390,000, mainly financed by equity. She bought a semi-detached house in West Sussex, funding a large portion of her purchase in euros, which strengthened dramatically against Sterling after the UK voted to leave the European Union.

Source: Bloomberg

When negotiations with the seller began, it was immediately clear that she had gained pricing power because the owners of the house she bought were in a chain, and felt the urgency to grab the opportunity, mainly due to Brexit-related uncertainty. That meant the parties agreed a deal well below (~10% or so) the asking price.

Cash outflows from her then-whopping £450-a-week rent in Ealing Broadway, West London, where she lived for almost six years, were immediately halved when her new mortgage – which was struck on convenient terms and on a long-term fixed rate – kicked in, as well as due to the conservative funding mix. The Bank of England has raised benchmark policy rates twice in the past year, so that proved to be a wise decision, although interest rates have gone nowhere fast since 2016 and consolidation of the 2% area appears to be the most likely outcome through to 2019.

Source: Bloomberg

Decision time

In those days, in our second year of business, with all the hard work and uncertainty that setting up a new shop brings, my sister traded her dependency on rent to become the owner of a place she loves. And, more importantly, she ended up owning an asset that gives her greater financial freedom – paper gains, too, need a mention, given that prices in her residential area have been holding up well over the past 24 months.  

More recently, a relatively young couple I know well relocated to SW London, and their property, worth just below $1 million, was worth every penny they paid. There was some currency arbitrage involved, too, but the side effects of a highly volatile exchange rate during the purchase process were broadly contained.

Another married couple who work in finance are confident that a $1.5m bid in NE London will be soon accepted, while some other friends have bought a nice piece of land in the countryside; their cash outlay was not that significant, but anything over $100,000 is meaningful, right? For them, too, more freedom, a healthier lifestyle and a chance for their children to grow up outside of the pressure cooker of London were too hard to pass up, and the economics were surely worth it.

Elsewhere, a fund manager I am doing some work for recently complained that its house in posh North London was not appreciating at the same speed as previously, “although I have never thought of selling it for any price, because I enjoy it and this is the right place for me”. Prime London is resilient, as research from specialist Knight Frank shows.

(Source: Knight Frank)

As far as I am concerned, I am an asset-light guy, but when the outcome of the Brexit vote emerged two years ago, I tripled my equity position (I had a relatively small exposure as a percentage of my total portfolio allocation), eventually profiting awesomely from a surge in selected equities with meaningful UK exposure – Yoox Net-a-Porter, which was later taken over by Richemont, was my biggest win.

All the UK investors I know, one way or another, have decided to bet on a stable outlook for a country that would be daft to so simply allow a no-deal Brexit deal, given the consequences, to come to pass, as I have argued ever since the doomsters have to tried to scare us with the most bearish scenarios. Yet, if you do not trust our judgement, how about the view of some of the largest corporations and investors on earth?

Well, only a few months away from the final Brexit deadline, it could be your turn to profit from broader uncertainty before the dust finally settles.

More than a just bunch of friends

Not only is British households’ confidence at its highest in years, but, in case you missed it, the largest Spanish lender, Banco Santander – which gained larger exposure to the UK after the purchase of Abby National in the pre-crisis credit binge years of 2008 – recently announced that “it would build a new technology hub in the English town of Milton Keynes, representing an investment of £150 million ($196.82 million)”.

Elsewhere, oil behemoth Exxon is “preparing £500 million upgrade to UK’s largest oil refinery“, marking its “biggest investment in the UK sector in nearly 30 years”.

As it happens, Record London rents lure overseas landlords” to the housing market, Bloomberg wrote recently, adding “Brexit-driven pound weakness gives buyers more for their money”. So, unsurprisingly, “Korean investor Hana (is) in talks to buy WeWork London landmark“.

If all this is not enough to convince you, consider that investment guru Warren Buffett is doubling down on the London property market, with Battersea, Fitzrovia and King’s Cross (where Google is based) topping his wish list.

Some bankers are leaving the City, complaining about the regulatory framework and how it is affecting the competitive landscape: I continue to pay attention to these moans, given the importance of services to UK GDP, but banking trends and investment have shifted in importance, while bankers’ net worth is much less relevant to London than tech-land’s investment plans. I recently had a lunch meeting close to Google’s HQ in London, and the place was buzzing, as opposed, lately, to the usual staid feeling of the Square Mile, which really has lost some sparkle in the past decade – although admittedly, in 2008 I was in the early, exciting years of my career just off Ludgate Hill in EC4, and nostalgia is certainly reflected in my disappointment .

(This post was written by Alessandro Pasetti. Ale is the founder of Hedging Beta Ltd. He writes about investment strategy and assets valuation for European clients as well as Seeking Alpha, The Loadstar, Transport Intelligence and others. Based in London, he previously worked for about five years at Dow Jones/The Wall Street Journal, producing analysis for the IB community. Prior to that, he contributed to the launch of London-based Loan Radar, where he worked for three years. He had stints in equity research at Bear Stearns in London, HVB in Munich, and Unicredit in Milan.

It was edited by Gavin van Marle, managing editor of London-based The Loadstar. Gavin is also the author of the book Around the World in Freighty Ways: Adventures in Globalisation. He has won numerous awards, including the Seahorse Journalist of the Year 2011 and 2009, and Supply Chain Journalist of the Year 2010 and 2014.)