How Brexit will impact Indian developers’ London dreams

Britain’s decision to exit from the European Union will likely make it difficult for Indian developers Lodha Group and Indiabulls Real Estate Ltd to profit from their multi-million-dollar bets in the near term but property buyers could benefit as prices fall and the pound weakens.

Lodha Group, one of India’s biggest developers, has bet big on London’s property market after striking back-to-back deals in late 2013 and early 2014. It recently launched its maiden project—Lincoln Square—in the city and has set an ambitious target of clocking $2.5 billion from its projects there.

Indiabulls also bet big on the London realty market by striking a $264 million deal in mid-2014. The company aims to come up with luxury residential project at the site.

Sobha Ltd is another developer that was looking at the London market for expansion (click here on why Indian developers zeroed in on London).

Shares of Indiabulls fell 6.6% while that of Sobha dropped 2.9% in a Mumbai market that ended 2.2% lower on Friday.

These developers will now face multiple challenges including sluggish sales and a plunge in prices, say industry observers. An analyst, who did not wish to be identified, said the developers may want to adopt a wait-and-watch plan but they don’t have the luxury of delaying the project launches for too long as that would only add to their debt pile-up. “The projects have been expensive buy for the Indian developers, so debt levels are fairly large,” he said.

An email to the spokesperson for Lodha seeking comment did not elicit any response. A spokesperson for Indiabulls Real Estate declined to comment. 

Analysts say another challenge for the developers would be restriction on access to the broader capital market of Europe.

Amit Goenka, managing partner at real estate private equity firm NIFCO, said people from London don’t buy as many properties as foreigners do. “With this move, they have isolated themselves from the European market and, therefore, a lot of demand that was coming from countries such as Russia and Turkey will get restricted. The move basically kills the free flow of capital in the region which will subdue the market in the short term,” he added.

He added that it is difficult to gauge the degree of impairment but it will be severe in terms of pricing in the short run.

Impact on investors, buyers

Kalpesh Maroo, partner at BMR Advisors, said London’s real estate market thrives on investments from across the globe, especially from the EU. He said that one of the consequences of Brexit will be that the mobility of people within the region will go down and this will impact the property market. Also, Indian investors had been investing in London as it offered appreciation and stability and this, too, will be impacted, he added.

The political uncertainty will either prompt investors to look for safer markets or stay put without committing more capital to avoid risk. Vinit Deo, chairman and managing director at Posiview Consulting, said potential buyers will wait and watch for now due to doubts over the UK's role as a financial hub. “Investors, who do not like volatility and uncertainty, will want to get clarity on the economic impact of Brexit before investing further in the property market,” he added.

What will also worry investors is the uncertainty around the British pound and the risk of holding assets represented by the currency–an important reason for investors to stay away from the currency before it gains stability.

However, the cheaper pound also offers an opportunity.

“This will make buying easier for investors, so those hoping to invest in the London market can take advantage of the situation,” said Goenka. “Non-EU buyers looking to buy in London look at the market in isolation, so to that extent the impairment is limited to buyers from within the EU. In fact, they will be better off as they will get better valuation, currency and can take advantage of the subdued cycle,” he said.

Shishir Baijal, chairman and managing director, Knight Frank (India) Pvt. Ltd, said that the combination of lower prices and a weaker pound should draw in Indian investors looking to acquire assets in the UK. “London has always been a favourite destination for Indian property buyers and it augurs well for the Indian investors to make their move now,” Baijal said.

On the other hand, investors in the UK looking to invest in residential properties outside the UK will have to study and compare returns and risks in India versus the EU. “After exiting the EU, countries such as Greece, Spain and Portugal may not remain as attractive to UK investors. India may benefit from that,” said Anuj Puri, chairman and country head, JLL India. “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," he added.

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