Abu Dhabi: International fund managers can cite the ‘Brexit’ as the biggest tail risk to markets all they want. In the UAE, companies with operations in the UK are not hitting the panic button just yet, though they are wary of the uncertainty the referendum brings.
On June 23, the UK will vote in a referendum on whether it will sever its ties with the European Union and exit it, or remain in the Union.
The uncertainty on the future of the UK has led to a depreciation in the pound and a drop in property prices. According to a report by Knight Frank, a real estate consultancy, there has been a “discernible Brexit effect” on the UK economy as investment decision are delayed, and the London property market is no exception.
However, negative sentiment and uncertainty can also have a silver lining for medium- and long-term investors as they mean valuations get more attractive.
Abu Dhabi Financial Group (ADFG), an investment firm with $3.2 billion (Dh11.80 billion) in total assets, said that London will remain a preferred choice for Middle Eastern investors regardless of the outcome of the referendum.
“While there is clearly significant uncertainty in the lead up to the vote, ultimately, the decision-making of Middle East investors about whether to invest in London property has little to do with the city’s location inside or outside of the EU.
Whatever [British people] choose, the attractiveness of property in one of the world’s great cities will be undiminished,” said Jasim Al Seddiqi, chief executive officer of ADFG.
Subdued demand
In a recent report, JLL, the property consultancy, said the value of direct real estate investment in the UK stood at £10.7 billion in the first quarter of 2016, marking a 31 per cent decline from the same quarter in 2015.
Consultants like Knight Frank see the Brexit vote behind the subdued demand.
Yet, JLL also pointed that the UK remained the second largest commercial real estate market globally in Q1 2016, accounting for 14 per cent of all transactions worldwide.
Large investors such as Abu Dhabi Financial Group tend to capitalise on periods of negative sentiment to find good valuations at a time when demand from everyone else slows. The company’s CEO started off 2016 doing exactly that and eyeing acquisitions in the UAE at a time when low oil prices were driving investors out of the market.
Pound depreciation
Other UAE-based companies such as NMC Health, which is listed on the London Stock Exchange and part of the FTSE 250 index, also saw a limited impact from the Brexit vote.
Prasanth Manghat, deputy chief executive officer of NMC Health, said that as the company is not based in the UK, it is “largely isolated from these types of macroeconomic events.”
He added that he did not expect the outcome of the Brexit vote to have an impact on NMC’s share prices, saying, “We believe that very often, stock markets tend to factor in expected upcoming changes into prices.”
From a fundamental perspective, that may well be the case. But on the technical side, the fluctuations in the value of the English pound mean that shares are cheaper for international investors.
On Monday, the pound slumped to a three-week low after a poll showed that the ‘Leave’ vote was gaining momentum, with more voters supporting an exit than those supporting the ‘RemaIN’ vote. If the UK does exit the EU, the pound is expected to face even greater volatility.
However, for Lulu Group International, the Abu Dhabi-based retail chain, the currency fluctuations are good news as they mean cheaper imports. A cheaper pound would also benefit The East India Company, a UK-based trading firm, in which Lulu owns a 10 per cent stake. Lulu also bought a 40 per cent stake in its fine foods subsidiary, and the cheaper pound would translate to increased exports.
Mohammad Althaf, director of Lulu’s UK operations, said he did not expect the UK to actually leave the EU, calling the chance “very remote.”
