Brexit could have major repercussions on UK real estate
Brexit could have major repercussions on UK real estate
The UK property market is mired in uncertainty as the nation decides whether it will remain in the EU or not
For a word that’s only been around for four years, it wields a lot of power. It is difficult to spend a day in the United Kingdom without hearing it uttered on the news, at a business meeting or in the supermarket queue. The Bank of America has reportedly banned its senior staff from mentioning it to clients. And it could bring down a prime minister who has so far survived scrutiny over his personal financial dealings, budget U-turns and allegations of intimate relations with a farmyard animal.
“Brexit” might be a small word but it’s big news. The portmanteau, referring to Britain exiting the European Union, was first coined in 2012 and has been on the stiff upper lips of Brits ever since. When, back in 2013, Prime Minister David Cameron promised a referendum on whether the UK should remain within the EU, the likelihood of the British public voting to leave seemed remote.
The Brexit campaign has gained momentum ever since, and today, 23 June 2016, the referendum date, the “remain” and “leave” votes still appear to be neck and neck.
Unsurprisingly, the confusion hanging over the UK ahead of such a momentous decision is affecting the property market. A recent KPMG survey of some of the biggest hitters in global real estate investment revealed that one-third of respondents “have reduced or plan to reduce investment before the referendum.” Andy Pyle, UK head of real estate for KPMG, sums up the mindset of many an investor: “Why invest now, when June isn’t that far away? In times of uncertainty, it’s easier to sit tight,” he says.
Market analysts don’t have to look too far to find a precedent for what is likely to happen should a majority of British voters choose the status quo. In 2014, Scottish voters did just that in a referendum on independence. The build-up to that vote saw property prices in Scotland stagnate as wariness reigned.
More: Could Brexit force property investors to exit the UK?
“A ‘remain’ vote would remove immediate economic uncertainty and market activity might be expected to recover any lost ground relatively rapidly,” according to a research report on the EU referendum by real estate consultancy Knight Frank. “This was certainly the experience in Scotland following their referendum.”
But what if the UK elects to leave the EU? Most analysts warn that in this scenario, the cloud of doubt currently looming over the property market won’t suddenly melt away on 24 June. Months of horse-trading as the UK disentangles itself from various trade, employment and financial frameworks could come at a cost.
Indeed, according to Pyle, this spell of skepticism would actually eclipse pre-referendum doubts. “While our analysis shows that the period to June is causing a hiatus for some, it’s the period of uncertainty after a ‘leave’ vote that investors are telling us is the real concern,” he says.
So it’s unsurprising, then, that in the event of a “leave” vote, two-thirds of 25 global real estate investors surveyed by KPMG said they would “slow down investment into UK property during the period of uncertainty as new terms of engagement with Europe are being worked out.”
According to KPMG’s findings, Berlin and Paris are likely to be the main beneficiaries as investors set sail for calmer waters away from a potentially turbulent period of post-Brexit upheaval.
Aside from the uncertainty, there are other concerns, says Ed Page, London-based real estate partner at global law firm King & Wood Mallesons. “If Brexit means that jobs are lost to the EU, then we will see a reduction in tenant demand in the UK, which is what underpins investor demand,” he warns.
More: Why London’s property market remains a solid bet
The dampening in occupier demand could, according to KPMG’s Pyle, “lead to London losing its dominant position as Europe’s leading financial centre,” whilst changes to migration agreements and the loss of an international workforce “wouldn’t just be bad news for London, it would have a knock-on effect across the regions, too.”
However, wherever there are losers, there are winners. According to Goldman Sachs, a Brexit could see the sterling decline by as much as 15-20 percent. This could tempt opportunistic foreign investors, Pyle says. “A cheaper pound could allow some investors to take advantage of less competitive processes, playing the long game, confident in the ability of the property industry to bounce back.”
Knight Frank concurs. A weakening of the pound “has potential implications for the central London market, where foreign home buyers are more active. The weakening of the pound could provide a short-term boost to demand in the capital.”
Whilst cautious about the referendum, some Asian investors are open to anything that takes some heat out of the feverish London market.
“The residential market, particularly in London, has already cooled, primarily as a result of the increases in stamp duty [taxes],” says Stephen Barter, KPMG UK’s chair of real estate advisory. “Asian investors who speak with me have interpreted this as calming a potentially overheating market.”
Asian buyers, however, are in wait-and-see mode like everyone else. “While underlying sentiment remains positive, many investors from Asia are cautious about the referendum, given the uncertainty over its outcome, and are preferring to await the result before making fresh commitments,” he says.
When it comes to the Brexit vote, one of the few certainties that everyone can agree on, it seems, is uncertainty.
This article was first published in Property Report issue no. 136.
Source: Property Report