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Assetz views on the EU Referendum and the ‘Leave’ Vote

Assetz views on the EU Referendum and the ‘Leave’ Vote

Stuart Law and, CEO of the Assetz group of companies including Assetz Property, the leading buy-to-let estate agency, and Assetz Capital, the leading peer-to-peer lender, believes that even though there will be many issues to address in the economy in the short to medium term, savvy investors will be able to profit from the types of opportunities that this change will make available.

The effects of Brexit on buy-to-let and peer-to-peer lending will be of great interest to both Assetz Property and Assetz Capital investors and we cover the potential effects of changes post-Brexit below.

Immigration

The country will probably start to experience labour shortages in many sectors that are reliant upon immigration due to many EU immigrants currently living in the UK potentially leaving in due course and new EU immigration slowing quickly. When the prospect of a long term future in the UK diminishes we expect potential immigrants to make decisions to go elsewhere from today onwards, not in two years’ time when we potentially exit Europe. This may affect many industries, with for example the already understaffed NHS frontline potentially losing many much needed workers but housebuilding could also slow substantially too through an even worse lack of labouring skills and this could apply upward pressure on prices. The retail sector could see a significant difficulty to find staff and restaurant, bar and coffee shops could see a significant fall in staffing and service levels. Businesses who have benefitted from immigration delivering much needed staff to support expansion and also benefitted from this holding back wage inflation could see both more staff shortages and upwards wage pressure.

Currency

The pound has weakened significantly following the vote and whilst this may help exports it will also drive inflation as we are so reliant on imports as a country. It will be a decision for the Bank of England as to whether to raise base rates to support the pound and strengthen it or to lower base rates further and even restart quantitative easing (QE) to stimulate the economy if it slows down. It is a very difficult decision for them but we feel given the pound has been far weaker than this a few years ago the decision will be to lower base rates and restart QE.

Economy

Overall the economy is expected to slow for a while and businesses will probably see a short term fall in confidence and we may well see a technical recession for a short period as businesses tighten their belts in anticipation of a dip in profits which will become self-fulfilling in the short term.

Nonetheless we expect the economy to recover relatively quickly as the uncertainty over what an exit from Europe actually means becomes clearer and the country moves on although there could well be unhelpful turmoil in the political corridors in the short term if a power struggle develops.

Interest Rates

Given we think that the Bank of England will act to support the economy rather than support the pound the base rate will probably go to zero very quickly now and they could in fact go negative (contrary to protestations that wouldn’t happen as it has in several other countries) and we could also see bank savings accounts go to near zero interest rates to reduce demand from savers because we also expect to see banks quickly reduce lending to businesses and housebuilders again and they will therefore have less need for those deposits. The Prudential Regulation Authority will also probably step in and impose tougher requirements on banks that hurt their profits and that will also lead to further reductions in lending to businesses and developers and hence the banks’ and housebuilders’ share price falls this morning by around 35%. Nonetheless this benefits our investors like you and we discuss this below.

Assetz Property - Buy to Let and House Prices

In terms of buy-to-let, we could see prime London house prices supported by the significantly weaker pound, spurring renewed investments from EU and global investors after a period of weakness in demand from those overseas investors. Nonetheless this will need to be weighed against the economic and currency uncertainty that will slow down those decisions. Overall we still expect prime London prices to continue falling and many of the tens of thousands of £million+ flats in the pipeline to be mothballed as demand from all over the world fails to meet that potential level of supply. The rest of London will definitely be hit by a perfect storm of several factors hitting house prices which is great news for house-buyers but not for investors and homeowners. We know that the City is going to relocate large numbers of highly paid bankers to Paris, Dublin and the rest of Europe and the loss of these highly paid house buyers and renters can only have a negative effect. Add that to the new buy to let mortgage interest tax and we see no appeal for speculative house price growth and negative cash-flow in London for the foreseeable future and expect a substantial continuation of the move of buy-to-let investment to the Northern Powerhouse.

The rest of the country is likely to be far more stable and we expect house prices to be very slow to react, if at all, as a minor economic slow-down is balanced by low mortgage interest rates (and probably falling further) and huge demand for housing. Nonetheless we expect to continue to see developers offer ‘deals’ and price reductions on some properties. Expect to also see large discounts to original asking prices in the pipeline of luxury London flats London property but best wait a year or two before trying to catch that ‘falling knife’ as initial price cuts don’t necessarily mean that type of property is correctly priced yet. Rents outside London will remain strong and continue to grow steadily, created by a modest reduction in house building as the banks reduce lending again.

In summary buy-to-let outside central London remains a strong contender for cash rich investors seeking to protect capital and produce an income well above bank interest rates.

Assetz Capital - Peer-to-Peer Lending

Brexit will also create a big opportunity for Assetz Capital’s investors as bank interest rates on business loan are likely to rise (making banks less competitive) and their lending volumes are reduced and at the same time banks are likely to lower their savings account rates even further. This will allow us to continue to grow strongly and deliver more lending to quality businesses who can provide us with solid loan security and also deliver more interest to our lenders. We have already lent around £120m to the British economy backed by what is principally strong property security at modest loan to value, and as a result our lenders have earned approaching £12m of interest since 2013. We expect this to continue but the credit team will be even more careful on the quality of businesses we lend to as we navigate the inevitable wobbles created out of the Brexit. Hard security on loans will be even more important but then that is our speciality. We have never lent on frothily priced housing developments in the prime London market as we had expectations of this type of set-back however we will continue to work with experienced developers of modestly sized and priced schemes in normal locations from London suburbs all the way out to the provinces.

In summary expect to see continuation of the attractive interest rates paid by Assetz Capital and a widening of the gap with bank savings account interest rates.

- June 24, 2016