Naomi Heaton, CEO of LCP, Comments
With the UK’s EU referendum fast approaching, questions are inevitably circulating about how the build-up and outcome will impact upon property prices and the future of the UK and London market. Indeed, in a bid to sway voters, George Osborne came out yesterday to say that property prices will be significantly dampened by a UK vote to leave.
Osborne is correct that the property market does stall in the face of investor uncertainty. This is demonstrated in general election years. In Central London, this slowdown is traditionally equivalent to an average 15% reduction in transactions and was reflected during the 2015 general election where sales volumes fell 18%. All the evidence, however, suggests that markets rally thereafter, regardless of the outcome. In 2005, the last time Labour were elected into power, transactions fell a staggering 31% in the lead up to the election but bounced back 26% after the result. Similarly in 2015, despite the significant tax headwinds impacting the market, the pre-election fall was counteracted by an 8% increase in sales activity shortly afterwards.
Due to the delay in reporting time for property sales, which have 6 weeks to be registered through HM Land Registry, little information is currently available as to any hold back in sales this year due to uncertainty around the referendum. In fact, current available figures from the Council of Mortgage Lenders show that gross mortgage lending in Q1 was 60% higher than a year ago. This, however, is distorted by buyers beating the new Stamp Duty changes for additional properties which came into effect in April. This anomaly is likely to magnify any fall away in transactions pre-referendum, so figures will need to be treated with care.
Whilst a holding back in sales, akin to a general election, is anticipated and anecdotally palpable as the EU referendum debate heats up, the upshot is that now is an excellent time for investors to buy. A slightly softer market as Brexit uncertainty is compounded by the current tax headwinds offers plenty of opportunity.
Despite the expected softening in sales volumes from experts, there is a largely positive outlook for property prices from London homeowners. A recent survey by property portal, Zoopla, has shown that 94% are predicting double digit growth over the next six months.
Notwithstanding a change in buying behaviour, a slowdown in sales is not expected to have a marked knock on effect for property prices in Prime Central London. Investors here, with low dependency on mortgages, are unlikely to be forced to sell in times of economic uncertainty. During the global credit squeeze, transactions fell a staggering 70% as the crisis ensued but prices fell just 14% as investors preferred to hold onto their assets and await economic clarity. Prices bounced back to par in 2010, just one year later.
To capitalise on the current market conditions, purchases should be focused on the sub-£1m sector of the PCL market. This has been far less affected by recent tax changes and price growth is expected to continue to be robust. Last year, sales activity in this bracket increased 7.8% compared with an 8.6% fall over £5m.
Stay Outcome: In the event of a vote to remain, a return to the status quo and a hardening of prices is expected. However, such an investor return is not always immediate, particularly in the face of the current tax environment. As with the 12 month lag during the Credit Crunch, a bounce back in transactions following a stay vote is not anticipated until next year.
Leave Outcome: As a global capital, directly affected by international, not domestic, concerns, Prime Central London property is probably most exposed to any future Brexit impacts. However, should the UK vote to leave, it has been suggested that there will also be a significant impact on the UK economy as a whole.
It is notable that the EU has only played a limited role in attracting international capital to the London property market. According to LCP’s latest audit, only 12% of buyers are from Europe. An unlikely total withdrawal of this sector will have very little net effect on property prices as a whole. Moreover, both Europeans and international investors outside Europe, are attracted by PCL’s reputation as a cultural, educational and financial centre, together with its rule of law, political and economic stability – all factors unaffected by a UK Brexit. From a property perspective, people will be attracted to this, whether or not the UK is a smaller power outside the European block.
Further currency devaluation should actually increase London’s attractiveness to international investors. This year, Brexit uncertainty has driven Sterling to lows not seen since the global credit squeeze. USD denominated investors, such as those in the Middle East for example, have been enjoying discounts of almost 1/5, thereby cancelling out the cost of the new 3% additional Stamp Duty. Investment Bank Nomura has predicted a further 15% fall in the pound as a result of Brexit and this continued depreciation is likely augment the global attractiveness of PCL property further. Whilst property nationwide will not benefit from this currency move, it should create a tailwind for foreign buyers coming into PCL property, countering any of the tax headwinds.
Investment Roundtable: Live with Jim Bianco
With Q4’s macro picture still looking grim amid the return of exponential coronavirus waves in Europe and the U.S. and Europe, we speak with veteran macroanalysis strategist Jim Bianco, CMT for a data-driven deep-dive into the global economy and financial markets on Sept. 7th at 12pm EDT.
- Learn from Jim’s unique combination of quantitative and qualitative analytics which provide an objective view on Rates, Currencies and Commodities to make smart investment decisions
- Identify important intermarket relationships he is watching with respect to Global Equities
- Roadmap a global outlook for 2021 in view of socio-political backdrop giving viewers key takeaways and intermarket perspectives on global investing.
Jim’s robust technical analysis includes a broad look at trends and themes in the markets, market internals, positioning such as the Commitment of Traders (COT), sentiment, and fund flows. Don’t miss out on this exclusive session from one of the investment world’s most insightful thought leaders.
Equity markets react to a rise in Covid-19 cases, uncertain Brexit talks and the upcoming US election
By Rupert Thompson, Chief Investment Officer at Kingswood
Equity markets had another choppy week, falling for most of it before recovering some of their losses on Friday and posting further gains this morning.
At their low point last week, global equities were down some 7% from their high in early September. US equities were down close to 10%, hurt by the large weighting to the tech giants which at least initially led the market decline.
The market correction is nothing out of the ordinary with 5-10% declines surprisingly common. Indeed, a set-back was arguably overdue given the size and speed of the market rebound from the low in March. As to the cause for the latest weakness, it is all too obvious – namely the second wave of infections being seen across the UK and much of Europe and the local lockdowns being imposed as a result.
These will inevitably take their toll on the economic recovery which was always set to slow significantly following an initial strong bounce. Indeed, business confidence fell back in September both here and in Europe with the declines led by the consumer-facing service sector. A further drop looks inevitable in October – fuelled no doubt in the UK by the prospect that the latest restrictions could be in place for as long as six months.
The job support package announced by Rishi Sunak did little to boost confidence. Its aim is to limit the surge in unemployment triggered by the end of the furlough scheme in October. However, the scheme is much less generous than the one it replaces as the government doesn’t want to continue subsidising jobs which are no longer viable longer term. A rise in the unemployment rate to 8% or so later this year still looks quite likely.
Aside from Covid, for the UK at least, there is of course another major source of uncertainty – namely Brexit. Another round of trade talks start this week and we are rapidly reaching crunch time with a deal needing to be largely finalised by the end of October.
Whether we end up with one or not is still far from clear. That said, the prospects for a deal maybe look rather better than they did a couple of weeks ago when the Government was busy tearing up parts of the Withdrawal Agreement. With significant Covid restrictions quite probably still in place in the new year and the Government already under attack for incompetence, it may not wish to take the flack for inflicting yet more chaos onto the economy.
Markets remain unimpressed. UK equities underperformed their global counterparts by a further 2.7% last week, bringing the cumulative underperformance to an impressive 24% so far this year. The UK weighting in the global equity index has now shrunk to all of 4.0%.
It is not only the UK which faces a few weeks of uncertainty. The US elections are on 3 November. We also have the first of three Presidential debates this Tuesday. Joe Biden’s lead looks far from unassailable, a close result could be contentious and control of Congress is also up for grabs.
All said and done, equity markets look set for a choppy few weeks. Further out, however, we remain more positive – not least because the focus should hopefully switch from the roll-out of new lockdowns to the roll-out of a vaccine.
What Investors are Looking for in the Next Fintech
By Shaun Puckrin, Chief Product Officer, Global Processing Services
Are investors getting pickier when it comes to fintech? It’s hard to say for sure, but there are recent developments that point towards a shift in investor interests.
Firstly, research from Innovate Finance shows that investment in UK fintech dropped by 39% in the first half of 2020, compared to the same period in 2019. In H1 2020, $1.8bn of venture capital was invested in 167 startups compared to H1 2019, when $3bn was invested in 263 startups.
However, it’s worth mentioning that the $1.8bn UK fintech investment earlier this year was still a 22% increase over the second half of 2019, when funding totalled $1.5bn. Therefore, all signs suggest that investors will make significant increases in capital investments during the rest of the year.
Secondly, it appears that the current investor appetite is for more mature, later-stage fintechs: more than half of the $1.8bn went to just five companies: Revolut, Checkout.com, Starling Bank, Onfido and Thought Machine. Perhaps it is the ongoing economic uncertainty surrounding the COVID-19 crisis that is prompting inventors towards perceived “safer bets”, but what we do know for a fact is that early-stage fintechs raised just 8% of the total investments.
Is there a silver lining? The coronavirus crisis has rapidly accelerated the digitisation of financial services, with lockdown restrictions encouraging those previously resistant to engage with digital financial services. The stage is set for fintechs to thrive and deliver offerings that meet shifting consumer demands. To be in with a shot of wooing investors, fintechs will need to demonstrate certain qualities that set them apart from other companies.
So, what are the four things investors are looking for in the next big fintech?
- A strong, differentiated proposition
The fintech marketplace is crowded and filled with mature innovators setting a high standard for everyone else. Against this backdrop, “challenging the incumbents” is, unfortunately, no longer a USP.
To really catch the attention of investors, you must be addressing a clear, pressing market need that no one else is tackling. Not just that, your proposition must be easily articulated and backed to the hilt with market research that proves the opportunity is worth pursuing.
Ultimately, investors are going to ask the question: why you? What are you doing that’s unique? What do you have that means you – and only you – can do this? They will also want to know how defendable that proposition is once you’ve built it. What is your moat? Getting this right means a foot in the door with investors.
- A path to profitability or exit
This is an extremely pertinent point, especially given recent news surrounding the financial results for many of the big challenger banks, and how they show the route to profitability for challengers isn’t necessarily straightforward or easy.
In the current environment, an attractive fintech must be able to demonstrate a concrete, long-term plan for the financial viability of the business. There are different paths for investors to make their returns, be it a trade sale or IPO, but the fundamentals of securing a successful outcome are usually the same. By being able to demonstrate how you can plot a course to attract and serve your customers for less than you can monetise them will be at the route of any subsequent valuation, no matter how its outcome is achieved.
Whatever the goal, you need a plan to support your ambitions. You need to demonstrate an understanding that building a scalable and sustainable fintech is likely to require significant capital – you must invest in the right people, partners and technology to make money. Developing competitive services, attracting customers and, crucially, monetising your offerings, requires hard work and the ability to adapt to your customer’s needs.
- Strong leadership and core team
Ultimately, securing investment is about building relationships and what often tips the scales is having the right people in the room. This is why a great team is crucial.
A great team means many things: Strong leadership with the vision to build something revolutionary. The skills and expertise to turn that vision into reality. The experience to traverse the pitfalls and opportunities you’ll face. And finally, the ambition and determination to make the business successful no matter what.
Building the right team with the right qualities is often what convinces investors that they’re putting their money in the right place.
- The right partnerships
Partnering with the right organisations can give you strategic access to the solutions that will help build and scale your offering. Their expertise and experience are often invaluable; many partners have been in the game for years and may have already solved problems you might be encountering for the first time.
From an investor’s perspective, seeing that you’re working with credible partners and proven tech helps build confidence. It shows that you’re a less risky investment, and that you respect their investment and are going to be using their money to build real value.
Fintech investment is not dead
After this recent blip, we expect the amount of investment into fintech to continue to be significant, at least in relation to other industries. But there’s no avoiding the fact that investors will be looking to stress test potential investments much more than before.
By creating a differentiated proposition, planning a clear route to profitability, building a strong team, and finding the right partners, fintechs will be in with a shot of securing the funding they need to make their grand vision a reality.
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