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Fast Money & Foreign Objects
- By
- Alen Mattich
- and
- Art Patnaude
A terrace of residential properties near London’s Regents Park.
Getty Images
Britons have a huge demand for foreign goods—on a broad measure the country imports far more than it exports. So where does the U.K. find the money to buy all this stuff?
Increasingly, an examination of fund-flow data shows the answer is property. Foreigners snapping up U.K. real estate have become a vital source of cash. Simply put, the U.K. is selling Belgravia to buy BMWs and swapping Islington for iPods.
A country’s current-account balance reflects its net financial position with the rest of the world. If, like the U.K., a country has a trade gap, or has less investment income than it pays out, it runs a current-account deficit. This deficit is balanced on the other side of the macroeconomic accounting ledger by capital inflows.
Few countries have bigger current-account deficits than the U.K. What’s more, its third quarter deficit, estimated at 5.1% of gross domestic product, was the U.K.’s biggest since the country went through an economic boom in the late 1980s. The firm Capital Economics estimates that the shortfall will total around £55 billion ($91.9 billion) for all of 2013.
Property sales are increasingly plugging a big chunk of this. As you’ll see from our graphic, last year, £20.6 billion ($33.6 billion) more flowed into U.K. commercial real estate than left the country for similar investments abroad, according to Real Capital Analytics.
At the same time, estate agency Savills estimated that some £7 billion flowed into London high end residential real estate alone, although it doesn’t estimate how much flowed out of the country. Together, commercial and residential flows likely covered between one-third and one-half of the deficit.
Click to view our annotated graphic.
The Wall Street Journal
That’s a huge rise. In 2007, only a net £2.8 billion flowed into U.K. commercial real estate from abroad, representing just a tenth of the then much smaller current account deficit.
Now those property flows are so big, a lot is riding on hope they’ll continue. If, instead, investors lose their appetite for British houses and office buildings, the British pound could slump—a similar process to that which played out in emerging markets like Turkey in recent months.
“You’ve got a growing financing need,” says David Bloom, HSBCHSBA.LN -0.63%’s chief currency strategist. “You need to feed the monster daily.”
What could trim the foreign demand? Prices, for one thing. Property is getting much more expensive. After the 2008 financial crisis, real-estate prices slumped along with sterling, making U.K. property look like a bargain to overseas buyers. But that trend has reversed.
For instance, London residential real estate prices have risen some 47% since their March 2009 lows, while the trade-weighted value of the pound has gone up 13% during the same time. There are already some signs of a dip in demand: Foreigners have been shifting away from prime central London property to more peripheral areas, according to commercial-property consultant Karen Sieracki.
Recent momentum in the U.K. real-estate market is likely to keep investors piling money in for the next year to 18 months, said Ms. Sieracki. By then valuations will truly be stretched, she added.
Mr. Bloom said the turning point might come sooner. He figures a balance-of-payments crisis might hit the pound by the end of the year.
Such a crisis wouldn’t even require foreigners to sell U.K. assets like property, says Mr. Bloom. It could be triggered if they stop buying—and the current-account deficit doesn’t show signs of shrinking.
Not everyone is worried.
The U.K. economy’s problem is that sterling is too high and London property is too expensive, argued Charles Dumas of Lombard Street Research, an economic consultancy. A shakeout of both would be all to the good, he added.
What’s more, the U.K. has historically had a large current-account deficit, and there are signs it could start to shrink, according to David Hutchings, European head of research at Cushman & Wakefield. And if the taps are turned off from current big sources of investment–such as China–other parts of the globe are likely to pick up the slack.
“In the U.K., history shows you one source of capital has tended to follow another,” Mr. Hutchings said. He says flows from Japan, Taiwan, Australia, Korea, Malaysia and Singapore are expected to increase over the coming years.
http://blogs.wsj.com/moneybeat/2014/03/10/britain-filling-a-hole-with-real-estate/