Resicom – Holiday Investment – 04-21 – LB

British Pound Still Has Buying Power Overseas

Following Brexit, there has been a level of uncertainty regarding British buying power overseas in Europe. The referendum saw Sterling fall around 14 per cent in value, a decline which followed a period of strong demand for European properties by British investors.

However, Athena Advisors, an international sales network and property investment advisory firm, have argued that the decline in currency value is offset by other factors at work within the market.

For example, in France there have been consistent decreases in mortgage rates available to non residents, meaning that investment values are retained. French Private Finance found that although a sterling-powered euro deposit is now 20 per cent more expensive in comparison to July 2015 due to the changes in exchange rates, a decline in mortgage rates means that the interest payable over a 20-year period is down 22 per cent following the European Central Bank trimming rates into negative territory, whilst the Bank of England has reduced them to a mere 0.25 per cent.

Athena explains: ‘Whilst deposits for properties are up-front, cash costs and mortgage interest are paid off over the duration of the loan nullifying lost currency value and enabling British buyers to retain reasonable buying power.’

The potential threat of the pound falling further still has been supported by new research from Scandinavian lender Danske Bank. However, once again, any further weakness exhibited by the GBP is likely to be instigated by interest rate cuts at the Bank of England, with Danske Bank’s forecast coming following the announcement of an easing package on August 4th. This suggests that a weakening of the pound will be driven by further interest rate cuts at the Bank, which would lead to lower financing costs, aiding foreign investors interested in the Eurozone.

In a note to clients, Danske Bank explained: ‘We expect BoE to cut the Bank Rate by 15bp to 0.10% and to increase its buying of both gilts and corporate bonds at the November meeting.’

Analysts anticipate weak UK GDP growth, monetary policy and flows to weigh on the GBP in the coming quarters, forecasting that EUR/GBP will rise to 0.90 in 6M, equating to a GBP into EUR rate at 1.110. However, on a longer term scale, Danske have suggested that they expect EUR/GBP to stabilise, targeting 0.88 in 12M, or 1.1363 in GBP/EUR terms.

As the Bank continues in the purchase of gilts and corporate debt the GBP is unlikely to show significant improvement, largely due to the fact that the flow of money into the market is rising. However, the manner in which this supports the economy should prevent any serious losses, suggesting that foreign investors should remain shielded from its effects.

It seems that stability is here to stay and the British pound can still go a fair way buying overseas property either for investment or personal use, or both.

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