BY TEE LIN SAY

Brexit, stamp duty regulations combine to take out property stocks

A combination of the new stamp duty regulations introduced on April 1, along with the aftermath of Brexit, have caused United Kingdom’s (UK) biggest property stocks to fall by a double digit quantum on a year to date basis.

Land Securities Group Plc, the largest commercial property development and investment company in the UK, is down by some 18.22% at its price of 962.5 pence, while Derwent London Plc, Central London’s largest real estate investment trust (REIT), is down 32.99% to 2,463 pence. Another REIT, Workspace Group plc, is down 39.44% to 580.5 pencce.

Many feel that this correction has only just begun.

On a more worrying note, UK property funds with about £18bil of assets have frozen withdrawals as investors seek to dump real estate holdings in the aftermath of Brexit.

Aberdeen Fund Managers Ltd cut the value of a property fund by 17% and suspended redemptions so that investors who asked their money back have time to reconsider.

Investors are pulling money from UK property funds as analysts warn that London office values could fall by as much as 20% within three years of the country leaving the EU.

To be fair, property prices in cental London have depreciated by some 10% to 15% prior to Brexit. The new stamp duty legislation which took place in April 1 this year had already depressed the market.

New legislation is adding an extra 3% to the stamp duty bills of those buying a second property from April 1, 2016. However, these hikes double the stamp duty fees in certain cases.

In London, where asking prices have been steadily soaring over the last decade, the additional hikes will hit those looking to buy a second home hardest.

For example, the stamp duty payable on a property worth £350,000 will rise from £7,500 to £18,000.

An article in a UK publication sights the example of a freehold properties worth £530,000, which is the average cost of a home in the capital. Buy-to-let investors will need to find £32,400 in stamp duty alone.

“From a business perspective, it would have been better for UK to remain in the European Union.

“With London being the evergreen property hotspot of the world, everybody wants some sort of real estate in London,” says a Malaysian corporate who owns a few properties in London.

From the perspective of a UK citizen however, they would have wanted the UK to exit the European Union because it was getting crowded and the public service sector was increasingly being overburdened. Property prices were continuously soaring and pricing many locals out.

Another Malaysian corporate who has been buying London property over the last two decades said that he exited the UK market in Nov 2015 last year.

“I cleared a lot of my positions in the UK property market after the Paris shootings in November.

“By January this year, I had disposed a fair bit. I knew that some of the smart money did the same thing. Despite some supposedly very clever quantitative analysts asking me to long London property, I sold my properties anyway. Fear was palpable in London earlier this year,” says this corporate person.

The Paris attacks happened on the evening of Nov 13, 2015. It was a series of coordinated terrorist attacks in Paris, France and the city’s northern suburb, Saint-Denis.

Three suicide bombers struck near the Stade de France in Saint-Denis, followed by suicide bombings and mass shootings at cafés, restaurants and a music venue in central Paris.

“From my meetings with my London friends, I was betting that Brexit would take place. In fact, I was expecting a higher margin for Brexit votes. The ‘old money’ were afraid and insecure after the Paris attacks. There was also this feeling that they did not want to ‘subsidise’ immigrants, some who might actually be terrorists,” says the corporate who owned some 10 properties at the height of his holdings.

“My friends in the UK who voted to exit wanted property prices to come down. The line of thought was that, with the UK out of the EU, there would be a little bit more restrictions for say someone in Hungary or Croatia to own property in the UK.

“With less demand for UK property, prices would come down and make it more affordable for the UK citizen,” says the first Malaysian corporate.

“I am now salivating. I do think that the correction has just begun and I am waiting for the right opportunity to reenter the market. I think it will take a while as the sentiment has now changed.

“There are now deflationary pressures and there is panic selling. We will have to let the correction play out its course. At the end of the day, London properties are still very sought after,” said the corporate.

Challenges for both the buyer and developer

Now, the current turmoil in London’s property market will definitely create challenges for both the buyer and the developers.

In the UK, investors can take up property loans where they only need to service the interest, and not the principal repayment.

Under these types of loans, there are yearly revaluations to assess what the properties are worth.

Banks will hire independent valuers to value the properties in question. This will affect the buyer who buys a property on loan.

So for instance, if the existing market value is lower than the initial value of the property when the loan was taken, the buyer will need to top up with additional capital to cover that shortfall.

This sort of loan works well during a rising property market, or if the buyer had bought the property market a very long time ago at a much lower price.

Malaysian buyers are not affected by this predicament, as Malaysian property loans are structured in the traditional way.

Nonetheless, they will be just as affected by depreciating property prices and the lack of liquidity in the UK property market now.

From a Malaysian developers point of view, the negative impact is more straightforward - they earn in pounds and will have to convert their earnings back to ringgit.

They will be hit both on the lower selling prices as well as the foreign exchange.

“Developers will need to offer a lot of discount and incentives,” says the corporate.

In the case of S P Setia Bhd, the first phase of its project is scheduled to be completed and delivered on a staggered basis starting from the fourth quarter of financial year 2016 (FY16) until the second quarter of FY17.

The group expects to recognise part of the profit from phase 1 in FY16.

To date, the property developer said it had sold about 85% of the total 1,661 units launched for the three phases of Battersea.

It has sold 99% of phase 1, 90% of phase 2 and about 60% of phase 3.

SP Setia’s other consortium partners for the 39-acre Battersea project are the Employees Provident Fund (20%) and the Sime Darby Group (40%).

Meanwhile, Eco World International Bhd (EWI), in which the listed Eco World Development Bhd will eventually hold a 30% stake in upon the former’s listing, has a huge exposure in the UK.

As at January 2016, EWI recorded £712mil in property sales.

Through a JV deal with Irish developer Ballymore Group inked last year, EWI is developing three residential projects in London.

EWI owns a 75% stake in EcoWorld-Ballymore, while the Ballymore Group owns the remaining 25% stake.

EcoWorld-Ballymore has sold more than half of the units of the first residential block in its single-largest property project in London – the Embassy Gardens Phase 2 as of last month.