Earlier in May, the sterling reached a 2023 high against the euro, with every pound worth €1.15. For some time, the pound has performed weakly against the euro, but that now looks to be changing, with some experts now predicting sterling will be more bullish against its European counterpart into the second half of 2023. In simple terms, this means that a sterling buyer may have more buying power in euros than they’ve had for a while, and investors who wanted to purchase European property but were waiting out tough markets, are now considering how to use the potential upward trajectory of the pound to their benefit in the context of a European property purchase.
A myriad of factors affect how sterling performs against the euro: Brexit, inflation, unemployment figures, the economy, trade, GDP growth and outlook and investor confidence in the European and the UK economy all affect exchange rates. The better the pound performs against the euro, the more sterling buyers can
While the UK economy (and with it, sterling) was rocked by confidence off the back of Liz Truss’ 2022 mini-budget and inflation, the euro has also taken a hit, rocked by concerns around the European banking sector (despite Credit Suisse being linked to the Swiss franc, it’s collapse raised serious concerns about the strength of the European banks) and inflation.
The UK economy, which was expected to contract in 2023 (partly on the basis of the Bank of England’s more aggressive rate hikes compared to those of the ECB), has, however, fared better than anticipated. This is further supported by low unemployment and better-than-expected GDP growth in the UK. In essence, the UK’s economy has performed better than expected, and as a result, sterling is performing better than expected and experts are now bullish on the trajectory of the exchange rate between sterling and euros.
While a lender might not be based in the same country as where you are buying a property (private banks and niche lenders tend to be the main players in the prime European mortgage market and many lend cross-border from main financial centres), a European mortgage will be linked to the European Central Bank’s (ECB) base rate. With European base rates continuing to rise, European property buyers are naturally considering what this means for them as they finance property via a mortgage or another type of loan, regardless of the exchange rate.
The ECB is battling to bring Europe’s inflation rate to 2% or less, and to meet this target, it’s expected to introduce at least one more rate hike in July, with another potentially following later this year. While the base rate is expected to peak in 2023, Christine Lagarde, President of the ECB, has already iterated that rates will need to rise in order to tackle European inflation, which has remained stubbornly high.
In the context of mortgages, base rates are simply another piece of the puzzle. The ECB raised the base rate in May to 3.25% with a further hike to 3.50% - or potentially 3.75% - expected over the summer. This may be the peak, but a rise to 4% isn’t off the cards. While a rising interest rate environment needs to be considered in the context of a mortgage, for prime property purchases they are less of a concern than in the middle market, given buyers are usually financing investment, trophy or holiday property and a mortgage is an optimisation tool for fiscal, estate planning and cash management purposes rather than a pure-play financial decision - although this is, of course, also a factor for some buyers.
It’s worth noting that the UK’s base rate sits at 4.5% with a peak expected later this year or early in 2024 at 5%. This is still above the ECB’s base rate, and so comparatively, there may well be savings to be made on a European mortgage compared to an equivalent in the UK, even without taking into consideration the exchange rate.
Much has been made in the European press of a potential ‘property crash’ with the beginning of 2023 seeing recessionary fears, inflation and market volatility translate to buyers choosing to pause property purchases. However, while there has been a correction in house prices in some parts of the European property market, these have tended to affect middle-market and lower-value real estate, rather than the top of the market, where prices may have corrected slightly, but valuations remain relatively similar to previous years. We also believe there have only been a few distressed property sales at the top of the market, rather than a slew of real estate coming onto the market as a result of buyers looking to dispose of them in the face of a personal ‘credit crunch.’
As prime and super-prime buyers tend to buy property for investment and leisure and finance property through mortgages and other funding mechanisms for fiscal, estate planning and cash-flow optimisation, rather as a pure-play financing requirement as you’d see in other parts of the market. While would-be buyers paused at the beginning of 2022 to see how the property market would be affected or if there would be a property crash, the prime property market has remained buoyant. What has also become clear to prime and super-prime property investors is that despite economic headwinds, there are rarely ‘bargains’ when it comes to high-value European property. Prices for prime Parisian apartments, villas on the Côte d’Azur, Swiss chalets, Monaco property and Portuguese, Spanish or Italian prime real estate have remained largely stable. While there can be room for negotiation in today’s market, it’s rare that properties are put on the market at significantly more than their market value, and as we look into the end of 2023 and into 2024, we believe we will start to see valuations appreciate - albeit perhaps at slower rates than in previous years - once more.
Lenders remain keen to offer mortgages to quality borrowers looking to purchase high-value properties in Europe’s prime and most liquid markets. There are no restrictions on financing British nationals and residents for luxury property in France, Italy, Spain, Portugal, Monaco and Switzerland (although there can be some restrictions at country level as to where a foreign national can buy real estate - Switzerland is a notable example). Plenty of lenders offer high-value European mortgages and the competition between players in the space means that with the help of a broker that can negotiate on your behalf, accessing the lowest rates is a possibility.
Private banks usually offer the most competitive mortgage rates for UK residents and nationals looking to buy prime European property. Ultimately, what you can borrow will depend on your financial background and liquidity, but you will usually need to have a net worth of at least one and a half or double the price of the property you want to buy and significant income. Lenders differ on this point but expect to need to be able to showcase income of at least (the equivalent of) €250,000 to be eligible for a private bank mortgage.
You’ll usually need to put a minimum of at least €1 million in assets under management (AUM) to access a European private bank mortgage, and place around 25-35% (at minimum) of the mortgage value for mortgages in excess of €2-3 million. However, placing AUM with a private bank will usually see you able to benefit from a 100% loan-to-value mortgage. Interest-only mortgages are also available.
The views and opinions expressed in this piece are those of the author. They do not constitute advise or a recommendation, and do not necessarily reflect the official policy or position of Enness. Views expressed are not intended to indicate any market or industry viewpoints, or those of other industry professionals.
Toby has 11 years’ experience working across London’s property and financial services markets.