Jeremy Corbyn Has Property Funds Plotting Their Own Brexits

(Bloomberg) -- Mark Stephen has bobbed and weaved through the worst that U.K. real estate markets could throw at him since the Brexit referendum upended British life in June 2016.

Now, as the Oct. 31 deadline for a deal with the European Union approaches, Stephen said he fears he may be about to hit a wall.

It isn’t crashing out of the European Union without a transition agreement that worries him. If anything, he sees a no-deal Brexit as an opportunity to scoop up U.K. real estate on the cheap. What really has him spooked is the possibility that Jeremy Corbyn, the left-wing leader of the Labour Party, becomes prime minister in a snap election that could be called before the year-end.

“I’d leave the country and relocate the business, probably to Singapore,” said Stephen, founder and managing director of Reditum Capital, a London-based firm that has made 487 million pounds ($610 million) in secured loans for property investments. “Corbyn is a game-changer.”

Financial professionals have long recoiled at the prospect of a Labour government. Whenever an election looms, the City of London’s pubs are often filled with talk of decamping to the Caribbean or Monaco should Labour take power. For the most part, it’s idle chatter. But Corbyn, 70, is different. He sings the socialist hymn “The Red Flag” at rallies, and has vowed to aggressively tax the wealthy and nationalize industries. A June report commissioned by Labour offered a series of proposals to “discourage land and housing from being treated as financial assets.”

A proposal to require landlords to sell to tenants at deep discounts “would make it impossible to operate in the property market,” Stephen said.

Stephen, 39, isn’t blind to the problems that plague U.K. housing. He has even tailored his investments to focus on some of the same issues that Labour seeks to tackle.

Ever since the 2016 Brexit vote, Stephen, an Australian who voted to remain in the EU, has been navigating the fallout by making moves he never anticipated.

For starters, Reditum, which invests capital for more than two dozen family offices from around the world, switched its focus from luxury real estate in prime London neighborhoods to more modest multi-unit housing projects in less posh locales.

Affordable Housing

Wracked by an acute shortage of affordable housing, the U.K. must build more than 3 million homes over the next 20 years to meet demand, according to a report by housing charity Shelter. The National Housing Federation said this week that 8.4 million people in England are living in unaffordable or substandard homes.

The U.K. isn’t the only market struggling with this problem. Campaigns to address the lack of affordable homes for first-time buyers are roiling cities from Toronto to San Francisco to Lisbon. In Berlin, advocates are calling for a referendum that would permit the state to expropriate apartments from big landlords. City leaders in June proposed a five-year freeze on rents. That same month, New York state passed a sweeping package of rent controls and protections for tenants.

In the U.K., Stephen bet affordable housing projects would move forward no matter what happens with Brexit. So he provided debt financing for projects aimed at first-time buyers in the London suburbs and cities in western and northern England. He also shunned developments dependent on sales to foreign investors even though overseas money was the fuel that drove U.K. real estate to such frothy heights before the Brexit vote.

“We knew there was a period where no one knew what was going to happen and foreign investors may slow down as long as Brexit remained a question mark,” Stephen said.
“So we felt more comfortable dealing with domestic buyers less prone to Brexit fears.”

His moves have delivered investors an annualized 17% return since 2016, and now he’s trying to raise a 250 million pound fund. Until recently, he and other investors were feeling pretty bullish about the U.K. property market’s recovery. After hitting a three-year low in October 2016, average house prices in the U.K. have jumped 8.6% to 232,710 pounds in July, according to government data.

Pivotal Moment

The high-end property market in London has reached a pivotal moment. On the one hand, the average price of a residence in the capital’s most desirable neighborhoods has skidded more than 20% from its high in June 2014, according to Savills Plc, a London-based real estate firm. While prices have stabilized -- they fell by only 0.3% in the third quarter -- many foreign investors may prefer to keep their powder dry. “London is a good value but buyers remain reluctant to come in as long as there is a risk of a hard left government,” said Lucian Cook, the head of residential research at Savills. “They want to see that pass.”

More bullish players see signs of a turnaround. Knight Frank, another luxury property firm, said an average of 8.3 buyers turned up for every listed new property in September, the highest in a decade. The 10% slide in the value of the pound to the U.S. dollar this year is driving some of that interest, but the data also show that affluent buyers are looking beyond Brexit, said Tom Bill, Knight Frank’s head of London residential research.

A Corbyn victory, though a long shot, could thwart a rebound. In a YouGov poll released on Sept. 19, Labour was running 11 points behind the Conservative Party and two points behind the resurgent Liberal Democrats, a centrist party that has vowed to revoke Brexit.

‘Dangerous Waters’

“We are in dangerous waters,” said Bruce Dear, the head of the London real estate team at the law firm Eversheds Sutherland. “We have a government that seems hellbent on smashing out of the EU -- deal or no deal -- and the possibility of another government that could abruptly and carelessly redistribute wealth and property, damaging house values and real estate markets.”

It isn’t just property investors who are worried about Corbyn. Wealthy British clients are preparing for a possible move by opening bank accounts in Portugal, Malta, and other countries with low taxes and fast-track citizenship, say advisers to family offices. And British business owners, wary that a Labour government would scrap tax breaks on capital gains, have been selling off minority stakes since 2017, said Claire Madden, managing partner of Connection Capital, a London-based private equity firm. “They want to derisk,” she said.

When it comes to handling a potential Corbyn-led government, Stephen and other property investors see little but pain. The party is hashing out specific proposals this week at its conference in Brighton. Potential measures include using a government-supervised trust to bring land into common ownership so rents can be socialized instead of flowing to private landlords and banks, and increasing capital-gains taxes on second homes and investment properties.

Earlier this month, John McDonnell, a member of Parliament and Labour’s top official on financial matters, said tenants should have the right to buy residences they are renting at a substantial discount to market prices. While McDonnell said in a BBC interview that landlords would be duly compensated, property owners decried the proposal as unfair. Just the prospect of such a law may trigger mass selling of residences, which would hurt the market as well as renters.

“There would be absolute pandemonium,” said Eversheds’ Dear.

That’s why Stephen, despite the costs and hassle, is contemplating pulling up stakes and taking his business to Singapore. “It would be disruptive,” he said, “but not as much as trying to do business in that environment.”

--With assistance from Ben Stupples, Jack Sidders and Kitty Donaldson.

To contact the reporter on this story: Edward Robinson in London at edrobinson@bloomberg.net

To contact the editors responsible for this story: Pierre Paulden at ppaulden@bloomberg.net, Rob Urban

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