How a no-deal Brexit would affect UK real estate and stocks

Investors are already pricing in the potential costs, pushing down the value of the pound ahead of the October 31 deadline

Boris Johnson, U.K. prime minister, listens beside Angela Merkel, Germany's chancellor, not pictured, during a news conference at the Chancellery in Berlin, Germany, on Wednesday, Aug. 21, 2019. At their first meeting since Johnson became British prime minister, both said they wanted to see the U.K. leave the European Union with a divorce agreement on Oct. 31. Photographer: Krisztian Bocsi/Bloomberg

Brexit headwinds continue to swirl around the currency markets, blowing the pound down to its lowest level since January 2017 against the US dollar at the time of writing. As investors price in the cost of a potential no-deal Brexit, a major question in the GCC countries is how a weaker GBP might affect real estate and other investments like stocks after October 31, the current Brexit deadline.

Property prices are expected to fall dramatically in the UK, at least based on the Bank of England’s disorderly withdrawal assumptions. Commercial property might decline by a massive 48 per cent and residential property by 30 per cent after the shock of a no-deal Brexit. Having said that, the GBP weakness may boost attraction towards the UK real estate sector. If the US dollar stays relatively strong compared to the GBP, investors and expatriates in the GCC countries may go bargain hunting after the Brexit fog clears.

In other investments, UK stocks may feel a chilling effect in the aftermath of a no-deal Brexit, with GCC investors staying away until the economy improves. Investor caution would likely apply more to the stocks that are based on the UK economy like real estate trusts. This point is underlined if you consider that the Financial Times Stock Exchange — the share index of the 100 companies on the London Stock Exchange with the highest market capitalisation — is estimated to be trading at a 21 per cent discount to its global peers.

Recession has been lurking ever since the Brexit referendum in 2016 and according to the latest developments, the UK economy contracted in the second quarter. This could lead to more volatility and uncertainty in stocks. On the other hand, although risks may be higher, a weaker economy might give rise to even more discounted stock prices and exports, attracting bargain hunters.

Tourism from the UK to the GCC countries may be pressured because of the weaker GBP exchange rate, making it more difficult for British tourists on a budget and this could impact the hotel industry and retail sales. Then again, the reverse is true for tourists from the GCC countries who are seen flocking to the UK for shopping to take advantage of favourable retail prices.

A bright spot is the prospect of closer relations between the UK and GCC as the British government seeks trading partners in other economic blocs. After the International Monetary Fund (IMF) cut its Mena economic forecast from 2 per cent to 1.3 per cent growth for the full-year 2019, international trading partners will become more important to sustain growth going forward.

The other side of the Brexit equation is the European Union’s economy. Germany’s Q2 GDP growth has contracted and Italy’s economy is sliding down the slippery slope towards recession. A no-deal Brexit would snap EU trading relations with most of the UK as they stand now and have a negative impact on the bloc’s economy.

The IMF scenario foresees that the EU’s growth would be reduced by 1.4 per cent, hurting long term productivity and adding to unemployment. The only way to avoid the worst-case scenario is if a trade deal is reached between the EU and the UK based on a Norway-type model. Norway has a European Economic Area (EEA) customs union with the EU, giving its goods and people access to the bloc’s markets with few restrictions. At this point, however, hopes of an EEA deal being reached between the UK and EU seem to be fading.

A further slowdown or recession in the EU would likely affect exports from the UAE to the bloc, which buys approximately €48.3 billion (Dh196.5bn) worth of goods per year, mainly fuels, minerals and chemicals. Indeed, the EU is the GCC countries’ top trading partner, taking up 14.6 per cent of trade, followed by China with 12.2 per cent, Japan with 8.5 per cent and India with 8.4 per cent. It’s safe to say that exports from the GCC countries to Europe may decline along with the EU’s growth but it is difficult to gauge by how much since there’s still uncertainty over how and when Brexit will finally happen.

On the whole, the GCC countries may benefit in terms of new economic and trading ties with the UK in the longer run but in the shorter run the impact is likely to be the same volatility and uncertainty we’ve seen so far in connection with the Brexit process.

Hussein Sayed is the chief market strategist at FXTM