Want $26,800 of free furniture? Of course you do.
And all you have to do to get it is move to London.
As Bloomberg reports, “London homebuilders are offering to pay sales taxes, gift 20,000 pounds ($26,800) of furniture and the chance to win a free parking space as Britain’s vote to leave the European Union damps demand.”
The post-Brexit rally in ... well, in nearly everything, is one of the most spectacular examples of whistling past the proverbial graveyard in recent memory. Just how aloof are stocks? Have a look:
(Chart: FactSet)
Equities haven’t been this expensive since the crisis and before that, since the aftermath of the dot-com collapse.
What makes this especially interesting in the context of the UK referendum isn’t so much the market’s resilience to the vote itself, but the market’s resilience in the face of what the vote signals about the willingness of the electorate to vote for radical change. This isn’t a politics site, so we won’t say whether radical change is necessarily good or bad for society, rather the point is that anything “radical” is almost by definition bad when it comes to markets. What do markets hate more than anything? That’s right, uncertainty, and if you were asked to pick which one of the following words isn’t compatible with the others, which would you say is the odd one out?: “uncertainty, radical, calm.”
But behind the veneer of complacency in the market, there were signs of trouble - big trouble. Recall that more than a half dozen UK property funds were forced to suspend withdrawals amid a wave of redemption requests following the referendum results. Needless to say you never, ever want to hear the words “redemptions” and “suspended” in the same sentence from your fund manager.
Other funds imposed steep haircuts for investors wanting out.
As FT notes, “the so-called fund gatings had prompted worries that fire sales of assets would bring down prices across the commercial property sector, as happened during the 2008 financial crisis.”
Remember, this is a market that’s been red-hot for years. In fact, prices have risen by nearly 50% in London in the last three years alone:
(Chart: Deutsche Bank)
And there were already headwinds pre-Brexit. Here’s Deutsche Bank to explain:
“Tax and financing changes mean landlord returns approach zero. The DB Real Estate team believes that material changes in buy-to-let (BTL) economics create a potential shock to London's illiquid residential property market. New tax rules will reduce BTL returns on equity towards zero and result in low or negative cashflow, particularly for new landlords. Meanwhile, new mortgage regulation could severely restrict the ability of investors to use leverage to buy properties. We expect these changes to result in a substantial fall in BTL purchases (c.40% of purchases in recent years) and some selling. This has the potential to be a major drag on a market where <4% of stock is turned over each year.”
(Chart: Deutsche Bank)
Essentially, being a landlord is about to become decidedly less profitable in a market that already has liquidity problems. “Galliard Homes Ltd. is offering a 3 percent discount for owner occupiers and will pay the stamp duty tax for buy-to-let investors, according to the firm’s website,” Bloomberg goes on to write, addressing some of the issues Deutsche Bank outlines. “It’s also offering the chance to win two parking lots worth 25,000 pounds each for buyers of a three-bedroom home at its Marine Wharf East development in London.”
So there are a couple of takeaways from this rather amusing story. First, if you’re in the market for say, a $120 million office building in London, now is the time to get a good deal.
Second, you can add “UK real estate meltdown” to your black swan, six sigma, tail risk list which, if you’re paying attention, should be growing by the week. This will become even more likely if the economic fallout from the EU exit ends up pushing the UK into recession.
(Chart: Barclays)
Third, and finally, when someone is willing to give you a whole bunch of free stuff and raffle tickets to do something, that’s probably a good sign that whatever they’re asking you to do is a bad idea. Remember that before you go getting too excited about the fact that the pound’s roughly 10% decline against the dollar post-Brexit gives you more London real estate buying power.
Oh well, we suppose free furniture beats the infamous Bankia Spiderman towels.