Outcomes from two past market upheavals in the United Kingdom foreshadow possible post-Brexit scenarios for foreign property investors. Recent MSCI analysis suggests outsiders can suffer a more painful hit or enjoy a better recovery from a geopolitical shock, depending on their timing and the strength of their domestic currency.

Niel Harmse, MSCI’s senior associate, global real estate research, tracked the performance of a hypothetical U.K. based portfolio following two such events — the June 2016 Brexit referendum results and the sell-off that occurred in September 1992 after the U.K. pound sterling (GBP) was withdrawn from European Exchange Rate Mechanism — and found varying results if is was valued in GBP, euros, U.S. dollars, Japanese yen or Australian dollars. When valued in non-GBP currency, the portfolio dropped more steeply in value in the aftermath of the trigger event and recovered more slowly.

U.K. based investors took a hit following the Brexit referendum before a rebound resulted in a cumulative return of 20 per cent from May 2016 to December 2018. Investors elsewhere in Europe, the U.S., Japan or Australia absorbed the depreciation of the U.K. currency against their own. “The euro-denominated index, over the same period, would have returned only 2.26 per cent,” Harmse notes.

The 1992 upheaval brought even more negative fallout for U.S. based investors. “A GBP-denominated index would have returned 38.23 per cent from August 1992 until December 1995, whereas a USD-denominated index would have lost 10.79 per cent over the same period, all due to currency exposure during a period of USD strength relative to the GDP,” Harmse reports.

In contrast, geopolitical shock can have an upside for foreign property investors who don’t experience it firsthand, but, rather, find resulting bargains. Property investment at the market low delivered superior theoretical returns in non-GBP currency — notably, a 37.5 per cent return in Australian dollars and a 32.8 per cent return in Japanese yen for the period from October 2016 to December 2018 versus a 21.9 per cent return when the portfolio is valued in U.K. currency.

“With the currency risk that comes with cross-border property investing, real estate portfolios can fluctuate in value like faster-moving, more liquid asset classes,” Harmse observes. “Such volatility can offer both risks and opportunities.”