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Wednesday 18 September 2019

How you can cash in on the weak pound without getting burnt

Weak sterling has made it cheaper to invest and shop in the UK, but do your research, writes Louise McBride

'The weak pound has made it much cheaper for Irish people to buy from the UK in recent month' (stock photo)
'The weak pound has made it much cheaper for Irish people to buy from the UK in recent month' (stock photo)
Louise McBride

Louise McBride

Your euro could be worth the same as a pound sterling in a couple of months' time.

This is certainly what a number of top economists, banks and other financial experts expect to happen, should the UK leave the EU without a deal on October 31 - a prospect which became even more likely last week when the Queen approved Boris Johnson's request to suspend the UK parliament for five weeks. The move to prorogue parliament sent sterling tumbling again last week. Should sterling reach parity with the single currency, it will be the cheapest time ever for Irish people to buy something priced in pounds - as it will be the first time a euro is worth the same, rather than less, than a pound.

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Sterling has had a rocky ride since the Brexit referendum of June 2016, hitting a near 10-year low against the euro last month. The weak pound has made it much cheaper for Irish people to buy from the UK in recent months, though not everyone has benefited - Irish exporters selling into Britain have come under huge pressure.

However, for consumers or investors wishing to cash in on the weak pound, what could be some of the best ways to do so?

British property

Sterling's recent record lows against the euro make it cheaper for Irish investors to buy UK assets. In mid-January 2007, for example, an Irish individual would have needed just over €150,000 to buy a British property priced at £100,000.

Falls in the value of sterling against the euro since meant that toward the end of last month, €109,000 would have bought a British property priced at £100,000. So for Irish investors interested in British property, weak sterling could be an opportunity to snap up a quality house cheaply - as long as you have a long investment horizon and can afford to leave your money in property for five to 10 years, or more.

Furthermore, property price growth in the UK has been sluggish in recent months and has fallen in some areas. With Brexit looming, consumers there have become increasingly cautious. So this, too, could increase the appeal to Irish investors.

"The combination of falling [UK] capital values and devaluation of the sterling currency presents opportunities for [overseas] investors looking to enter the UK property market at an attractive basis - provided they believe in the strong long-term fundamentals of the market," said Simon Durkin, head of European real assets research at the global investment manager BlackRock.

"For investors looking to real estate as a currency play, the City of London office market is looking increasingly attractive. However, this has to be judged against a weaker domestic UK and global economy - with the added spectre of Brexit."

Last month, the yield (annual return for investors) on prime city offices in London was north of 4pc - whereas the yield on prime city offices in Paris's central business district and Munich was around 2.8pc, according to Durkin.

"If you overlay that [higher yield on London offices] with an additional return boost from the devaluation of sterling, then it will not be surprising that many overseas investors will be watching the market very closely," he said.

"Having said that, the over-riding concerns surrounding Brexit and the global economy must be given due consideration."

Those interested in the UK market must be careful about the property chosen. Investment experts usually advise to stick to quality British properties - that is, well-located and sought-after properties near good public transport links, which will easily secure tenants or buyers.

"In times of elevated uncertainty, resilience is key," said Durkin, who for that reason advised investors in UK property to target sectors "which play to long-term structural trends, such as student housing, private rented residential, healthcare (such as GP surgeries, National Health Service facilities, private hospitals, specialist clinics and care homes), and technology-intensive assets - including logistics".

Technology-intensive assets include the properties and offices of technology and logistics companies - such as delivery hubs.

Be aware that any further fall in sterling after you have bought into UK property will devalue your investment. Any rental income earned from a UK property will also be hit by any weakness in the pound as such income is usually paid in sterling. This is why it is important to only invest in UK property if you can take a long-term view - and if you believe sterling will eventually recover.

Investing in UK retail properties, such as shopping centres, could be a bad move. There are concerns that Britain may be sliding into a recession - and retailers are usually hit badly during an economic downturn. Furthermore, the increased popularity of online shopping has already put many retailers under pressure.

UK REITS

A number of UK real estate investment trusts (REITs - property investment companies listed on the stock exchange) are offering good value to investors, according to David Flynn, chief investment strategist at Baggot Investment Partners. "You've got to do your homework on UK office property and UK REITs, but the investments in this space which don't have too much debt attached to them are offering fantastic value," said Flynn. However, people should hold off investing in UK REITs until after October 31, when Britain is set to leave the EU, advised Flynn.

"If the worst-case scenario (that is, a no-deal Brexit) happens on October 31, there could be a major fallout in sterling and UK equities - and that should be the bottom of the market," said Flynn. If such a fallout unfolds, the pound could reach parity with the euro, which should make it cheaper to buy sterling-based investments than it is today. However, should Britain leave the EU with a deal on October 31, sterling could recover.

Before investing in a REIT, understand exactly what you are getting into - including the risks and charges involved. Have a good understanding of the properties the REIT is investing in - and your chances of making a return on them.

Stock up on sterling

The weak pound has prompted interest in it from investors outside the UK - who now consider it cheap. "I believe it would be good to buy sterling as an investment - particularly when €1 is worth more than 92p sterling," said Flynn.

Should sterling fall further and the euro be worth 95p, or should it reach parity with the euro, Flynn said this would represent a "beautiful long-term buying opportunity".

"It's highly likely that investment analysts are too pessimistic on sterling," said Flynn. "In my longer-term view, sterling should correct down toward the 80p to 82p euro to sterling rate in time - so there's good value to be had by buying sterling at rates of around 92p to 95p, or higher, against the euro."

Investing in currency - and predicting currency movements - is risky, so be aware of, and comfortable with, the risks before doing so.

Stocking up on sterling when the currency is weak could be a shrewd move for Irish people who regularly travel to the UK - whether that be for work, holidays or to visit relatives. The cheapest time to convert your euro into sterling is when it is at record lows. Had you bought £1,000 towards the end of last month, for example, it would have cost about €1,094 (depending on the exact day you converted your euro). However, in the middle of January 2007, it would have cost around €1,520 - almost €430 more - to buy £1,000.

Buy a car up north

"The price of cars imported from the North has dropped significantly as a result of the weak sterling," said Kieran Whelton, managing director of Kieran Whelton Motors in Knock, Co Mayo.

Whelton, who imports used cars from the UK, said that it is possible to save between €3,000 and €4,000 by importing used cars such as the Hyundai Tucson, Skoda Octavia, Ford Focus, Volkswagen Golf and Ford Mondeo from the North. The potential savings on used top-end models - such as Mercedes, Audi or BMW - are greater. "You could save up to between €8,000 and €10,000 by importing a 2018 Audi or Mercedes from the North," said Whelton.

"That compares with savings of between €6,000 and €7,000 by importing a similar car a few years ago. There weren't as many savings to be made two to three years ago [by importing a car from the UK] as there are today."

Like any big-ticket purchase, do your research before you buy - and know where you will stand if things go wrong with the car after you buy.

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