Brexit: The Asian view

Private real estate firms in Asia have predicted the impending departure of Britain from the European Union will have a bigger impact on currency and interest rates than on their investment strategies.

Asian markets this week saw a continuity of the tumult caused by Friday's shock leave vote in Britain's referendum on its continued membership of the European Union.

Most stock markets in the region opened significantly lower, while the British pound continued to depreciate in value against other major currencies.

Apart from Japan's Nikkei, which saw an early gain of more than 1 percent when markets opened for their first day of trading yesterday, Asian exchanges registered early losses of between 1 percent and 2 percent as investors acted on what is expected to be a period of uncertainty caused by the result. While early trading today has seen some of the losses recovered, Asian equities remain sensitive. Sterling, which has dropped meaningfully since the vote, was valued at $1.33 and €1.21 at the time of writing.

Asian private property professionals, however, have sounded a more sanguine note in response to Friday's result.

In a note to investors from Gaw Capital Partners, the Hong Kong-based private equity real estate firm, the firm said it expected markets to “over-compensate” and that would lead to volatility, particularly in liquid markets.

But the firm added markets should revert to a more realistic level over the next week as “rational minds prevail”. In the meantime, Gaw Capital pointed to the two-year process that is expected to ensue as the British government negotiates with the EU on the terms of its disengagement as a period when meaningful economic changes are unlikely.

“There are multiple options as the UK can remain part of the European Economic Cooperation, or negotiate bilateral accords,” the firm said in the note.

The firm, which has a sizeable exposure to London via a series of separate account mandates with Korean pension funds and Chinese insurance companies, added: “The UK will still be the financial capital and insurance capital to the world and is not likely to be replaced by Frankfurt or Paris in the near future or ever.”

Meanwhile, Andrew Moore, chief executive officer of Pamfleet, a Hong Kong and Singapore-focused private equity real estate firm, predicted there would be little direct fallout for Asian investment strategies, although capital raising for them might become challenging in the short term.

He said: “The only positive to come out of this for investment in Asia is that interest rates will almost certainly remain lower than they would have if things went the other way. I cannot see anything else good for investment in Asia. There are, of course, bad outcomes, chief of which is the uncertainty.”

“We're not in fundraising right now but had we been there could have been a negative reaction from investors. This uncertainty is enough to trip an allocation decision,” he added.

David Schaefer, head of Asia at AEW, agreed current fundraising programs might become challenging, but also that the immediate impact for Asian investment strategies would likely be muted. “In terms of our interests, the retail assets serve local consumers and the offices serve multinationals to which there may be an impact on trade prospects. But I expect the overall impact to be pretty small. China's growth remains our main focus.”

Schaefer did, however, expect to see the impact on currencies to offer up further buying opportunities. “Uncertainty tends to lead to US dollar appreciation and that could lead to short-term weakness in currencies like the Korean won which, in turn, could lead to attractive entry pricing.”

“But, generally, I don't see the situation in the UK economy having much of a material impact on the Asia markets.”

The region's brokerage community offered up further words of encouragement. Henry Chin, head of research, Asia Pacific, at property services giant CBRE, said: “In the short term, we expect APAC investors to adopt a wait-and-see approach while they receive more clarity on the future developments arising from the UK's decision to leave the EU.”

“CBRE expects some hesitancy from investors, however, the UK, especially London, will continue to remain attractive for Asian investors driven by the inherent attractiveness of the market, including its transparency, political stability, market liquidity and the openness of its legal framework for foreign investors, which includes their tax structure. A decline in the value of the sterling could also be a catalyst for increased foreign investment in the UK due to attractive returns.”

CBRE's rival Colliers International published a response in which it said Britain's exit from the EU will have three main implications for Asian property markets. As well as predicting low interest rates, the firm forecasted downward pressure on bond yields which would make core property yields in the region more attractive. The firm also said the shock result showed that established economies were also prone to the political volatility expected of certain Asian markets.