The BREXIT effect: JLL

The following is the report by Anuj Puri, Chairman & Country Head, JLL India

Investors will now be in a risk-off mode, meaning more investors would either pull out investments or stay put without investing further until clarity emerges. Until today, the year 2016 was looking seemingly positive for the real estate sector in terms of investment inflows (read PE or FDI inflows), but now that is somewhat at risk.

· The real estate sector in India will continue recovering on the back of a resilient Indian economy and strong capital inflows. Brexit will not disturb that recovery much, since India’s office market leasing is dependent only by 5-7 percent on UK-headquartered companies, and investments and activity of PE Funds from EU countries are more in India than in the UK.

· Investors in the UK looking to invest in residential properties outside the UK will have to study and compare returns and risk assessments for real estate in India versus real estate in the EU. After exiting the EU, locations like Greece, Spain and Portugal may not remain as attractive to UK investors, and India may benefit from that. However, investors will refrain from making plays for some time as they will want to develop a good understanding of the comparative risks- returns scenario.

· The first reaction of investors to a situation like this is to exit from sectors that are perceived as risky. Given the Indian stock markets’ recent performance, real estate was considered risky until recently; it had only begun to emerge out on the back of policy reforms like RERA and other factors providing a positive market momentum. Given a risk-off sentiment, realty stocks could witness selling pressure as investors scramble for safe-haven sectors such as FMCG or pharmaceuticals.

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· Several major IT firms such as Infosys, TCS and HCL Tech earn a third of their revenues from the EU. The possibility of EU slowing down will have an adverse impact on their revenues. The IT sector is a leading occupier of office space in India every year.

· Year 2015 saw many European retailers entering India as part of their expansion strategy to new markets. We had anticipated this trend to continue in 2016. However, if the EU economic outlook weakens, their expansion strategies may be reconsidered.

· India could be an anchor of stability, given that a proactive government has carried out reforms at a satisfactory pace and that its inflation has remained controlled over the last one year or so. Also, given a normal monsoon forecast for this year, even food inflation could be kept in control in the near-to-medium term while triggering a healthy growth of agriculture and rural economy.

· Given that BREXIT has happened, we foresee US Federal Reserve deferring their decision to hike interest rates, which is positive for the emerging world, including India.

· India’s bilateral trade with Great Britain is an export surplus, which is good for India. However, compliance costs for India’s exports will rise. At the same time, India can negotiate more favorable trade terms with Britain. After losing out to free trade with the EU, Britain will be under pressure to look for balanced trade with big emerging economies like India, which is the fastest-growing economy.

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· When the economic recession hit the US, Indians took up a leading position among investors keen to take advantage of the falling property prices there. The British Pound is currently at a 31-year low, which itself provides an attractive rationale for foreign investors with an appetite to do so to acquire properties in the UK. There is no doubt that the UK – particularly cities like London – has always held a special attraction for Indians, particularly HNIs, with business interests or families there. Such individuals will certainly keep a close watch on the effect of Brexit on UK’s property prices, and it is very likely that many more Indians will seek to invest there.

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