The upside of Brexit

November 17, 2016 09:00 AM
Tsunami of Chinese money to power London real-estate

Brexit, the latest addition to the financial lexicon, has held the news media’s attention since weeks before the historic June 23 vote. 

Economists, notorious for their inability to agree, immediately and unanimously began to forecast negative implications for the British economy. Prior to the vote, even Bank of England Governor Mark Carney weighed in with a warning on a downturn from a pro-Brexit vote. Carney noted that he was ready to act to combat any headwinds that resulted from it. Due to the emotional nature of the vote, he was immediately attacked for what some saw as tampering with the political process as the UK (and more recently, America) has been ripe with populist notions that target financial sector elites. 

Sure enough, soon after the vote that stunned experts, the FTSE and sterling immediately tanked. Uncertainty reared its head again causing central bankers to re-think stimulus strategies. While markets roiled and tempers flared, financial experts couldn’t understand what drove the decision that would clearly damage the British economy. 

But is there an upside? What else would be affected? Market experts see softness in real estate, and although listing prices have increased, the actual sales prices haven’t and that is a textbook definition of a bubble. 

What caused the increase in real estate prices? Global financiers and speculators. As Londoners are quick to say, the city has lots of financial services people. Between expatriate financiers and traders, along with international emigres, London is rife with these individuals. We are the culprits who have bid up real estate prices in the Mayfair district, much to the chagrin of local Brits (despite the latter being the beneficiaries). 

Like the tech industry to San Francisco, Mayfair is now out-of-reach to the locals as expatriate financiers and global elites look to secure a second residence in London. Additionally, international investment firms have bid up real estate as London parried with New York as the international investment center to the world. This pushed prices precipitously higher.

Immediately after the Brexit vote, financial service firms such as J.P. Morgan announced they would scale back their presence in the city, creating commercial and residential softness in the high end real estate market. The erosion of the financial industry could cause problems for the UK as all property will be affected. Financial services are one of the few areas where incomes have increased while others have languished post the Great Recession.

Taking a page from the storied family of Jacob Rothschild, I asked where the opportunities would be during this difficult period. As the Rothschild’s say: “Buy on the cannons, sell on the Trumpets!”

What were we missing because we view the world with a financial lens? What do we import from the U.K. aside from Ian Fleming’s James Bond? Tourism; people love to visit the old empire.

The largest product that the UK has is a stationary one: The Crown. The palaces, museums, art and jewels that people wish to see are across the English Channel and require a visit. A weak sterling supports this as it has been insufferably high for most.

Experts see a possible double-digit percentage increase in tourism, given the weakness of the pound. The drop in the sterling could lead to a dramatic increase in UK retail along with softer real estate prices.

I attended a special meeting at the Bloomberg headquarters with Chancellor of the Exchequer, Philip Hammond where he assured investors, who seemed to turn pro-Brexit overnight, of the recent position by Prime Minister Theresa May. Most assumed she had succumbed to populism. Indeed, the buzz prior to Hammond speaking was uncertainty on his grasp of the gravity of the situation, but he did a yeoman job of assuring people that there was an effective plan in place for future success. 

During the annual IMF October fall meetings, the Chancellor conveyed confidence in the plans that the government was preparing. When pressed about the falling rate of the sterling, he said assuredly that the U.K. government was fine with the price set by the market. He also made a very significant point: Chinese visa applications increased 25% upon the fall of the British pound. 

This statement is significant, because most experts expect the velocity of money exiting China to increase due to an impending drop in the yuan, caused by the internationalization of the currency and the subsequent market pressures, which will make it more difficult for the Chinese to peg their currency. 

Because all real estate looks cheap from Shanghai,  Chinese demand for Mayfair real estate will likely grow. UK tourism and retail will uptick, followed by a tsunami of Chinese money to power more purchases.

About the Author

Shawn Baldwin is Chairman of the AIA Group, an advisory firm. Prior, Baldwin built investment banking firm Capital Management Group (CMG). CMG participated in $68b capital markets transactions for the NYSE, the Chicago Mercantile Exchange and Google. Baldwin has been a contributor to CNBC, Bloomberg, CNN, Forbes and Fast Company. Baldwin received a master’s in Financial Strategy from the University of Oxford’s Said School of Business.