Falling pound will unlikely prompt major overseas buying spree, forecasts Capital Economics

Sterling dropped more than 4 per cent last Tuesday in its worst month since October 2016 on an increasing probability of the UK leaving the EU on 31 in a no-deal Brexit.

In a note to clients, Capital Economics dismissed the “conventional wisdom” that a weaker pound drives overseas demand for UK commercial property.

Amy Wood, Property Economist, at Capital Economics wrote:

“With valuations looking stretched and the rental value outlook weak, regardless of how the pound moves in response to Brexit, we do not expect a rebound in overseas demand for property.

“This is because, whether a deal is agreed or not, we think that capital values will decline. This reflects our view that, given property valuations look stretched, there will be further upwards pressure on property yields. In a no deal, yields are expected to spike as a result of uncertainty about the outlook for rental value growth, whereas under a deal, yields are likely to rise as interest rates and bond yields increase.

“In either case, weakness in the retail sector is expected to be the main drag on all-property rental values. As such, we think that the property investment environment in the UK will be less favourable for overseas investors than it has been in recent times.”

To read the full Capital Economics note, please click here.

Nigel Green, the founder and chief executive of DeVere Group, says:

“The British pound is now the second-worst performing currency in the entire world. Mr Johnson is ramping up no-deal preparations and it looks increasingly likely the UK crashes out of the EU in a no-deal scenario in October.  Even though this has largely been priced-in by the markets, there can be no doubt that it has also intensified uncertainty and, in response, the already weak pound fell and continues to flounder.

“Should the UK leave with no-deal, the pound can be expected to remain weak for several years until the country and the bloc readjusts.”

james.wallace@realassetmedia.com