South: What now for CRE as UK chooses Brexit? asks CoStar News

The UK electorate has spoken and it has chosen to leave the EU, a vote many in the commercial real estate industry have dreaded, says CoStar News. Hopes of a speedy second half bounce-back in transactions on the back of a remain vote have been immediately extinguished and there is much concern about the period of uncertainty that comes now as the UK redraws its position on the global stage. That said the property industry has had plenty of time to prepare itself for this eventuality and is already providing level-headed advice as to how to respond in order to survive and prosper.

"Wherever your sympathies lie on the EU, there is no doubt last night's vote was a momentous one for the UK and Europe and the turmoil it has initially prompted in the financial markets as well as the sight of plummeting sterling value charts and a hastily-departing prime minister is causing alarm across the property industry," writes Paul Newman of CoStar News. "That said there are many who will see opportunity in the near and medium term." 

The following comments from key players in the industry are published here courtesy of CoStar.

Andy Pyle, UK head of real estate at KPMG: “Until the dust starts to settle, the impact of the UK’s exit from the EU on the real estate market is difficult to determine and uncertainty will prevail.

“Whilst this uncertainty over timing and the UK’s future trading relationship with the EU remains, we expect the majority of UK companies will focus their attention on assessing the impact on their business. We would expect their appetite to enter new property leases and increase their liabilities would diminish, leading to a general dip in occupier demand. It’s also reasonable to expect that, while there could be an impact across the UK as a whole, there will be significant variations in that impact across the regions and in different property asset classes. Given the potential for banks to need to transfer business undertaken in London into the Eurozone, we could see a particular decline in London’s dominant position as Europe’s leading financial and business centre, which would impact real estate demand in the City in particular.

“Similarly, we would expect investors will carefully assess the impact before making major decisions as to whether to buy or sell property. We have seen a significant slow-down in the volume of transactions in the run up to the referendum and it’s likely that will continue. This is consistent with what international investors told us when we surveyed them in March*, but the majority also told us they expected to continue to invest in the UK going forward, regardless of whether the UK left the EU.

“Should sterling go into tailspin in the next few days, weeks and months, international investors playing the long game are more likely to jump on what could be a once in a lifetime chance to get hold of ‘cheap’ property. While this won’t be limited to real estate, the enduring rule of law and objectivity of private property protection in the UK, will make investing at a low point in the market very attractive. Given the strength of the UK property market and its track record of bouncing back, it’s likely to be seen as a relatively safe bet, despite currency turmoil.

“And of course, there is a consideration over how migration will be dealt with – our construction industry relies heavily on EU workers. Should rules change to limit those workers, we will see an even bigger skills deficit in the industry, with a knock on effect on both the commercial and residential property markets. While that may be a longer term concern, given the time any changes to migration rules are likely to take, it’s a distinct possibility.

“While the actual impact will take time to play out, what’s important is that the Government and the industry recognises that as terms are defined and agreed, it is vital to maintain the attractiveness of the UK as a place to invest in property. Outside of those involved directly in the market, the wider UK economy has significant exposure to the real estate market – just think about the property investments made by our pension funds.”

Rob Thompson, head of real estate London at Irwin Mitchell: "Britain’s decision to leave the EU is monumental. However, property law is not heavily influenced by EU legislation and, therefore, Brexit will be a market issue, rather than a strictly legal one. In recent months, the press has been awash with competing predictions about the impact of Brexit but the almost universal consensus of economists and property professionals is that leaving Europe will have an effect on transactional activity levels in the UK property market, at least in the short term.

"We are now entering an extended period of uncertainty whilst the government spends time negotiating its exit from Europe. The hope is that the UK can somehow negotiate the continued benefit of free trade whilst reducing its EU budgetary commitment and avoiding EU regulation and the requirements of the free movement of people. In short, the UK will be seeking a better deal than either the European Economic Area (as per Norway) or the European Free Trade Association (as per Switzerland) can offer. Sectors such as manufacturing, logistics and construction will also be concerned about the non-availability of foreign labour, on which they rely heavily.

"We have already seen a period of outflow from commercial property funds (February reportedly saw the largest monthly sell-off since 2008) and European banks, which hold a large volume of securitised debt, may start to divest themselves of some of this debt in response to Brexit. Overseas investor and developer confidence in the residential sector will also be affected and Brexit is likely to slow, if not stall, investment in new housing development and will probably disrupt the inflow of labour and materials to the UK. There are also broader economic questions around the effect of Brexit on currency markets and interest rates. These, too, will impact on the property market as much as any other.

"Many though are more optimistic and predict that, after a short term dip, the UK property market will thrive as trade is boosted due to the removal of import tariffs and the dumping of regulations. Opportunistic investors will no doubt look to take advantage of uncertain market conditions to extract greater value on acquisitions.

"On top of this, we should not lose sight of the fact that the UK is an incredibly resilient and adaptable economy and it is difficult to see how the City of London will not continue to remain as one of the leading financial centres of the world. The UK is also a major focal point for the technology industry and companies exposed to this sector are much less likely to be affected by the implications of Brexit.

"So all is not doom and gloom - the English legal system and the transparency of the UK property market will continue to be the envy of the world and it is difficult to see why international capital will not continue to find its way into the UK property market after an initial period of reflection and evaluation.”

Patrick Scanlon at Knight Frank: "The vote to leave the European Union creates both threats and opportunities for the Central London office market. Economic uncertainty is rarely a positive for any market, and in the short-term we should expect some occupiers to delay committing to new office moves as they take stock of what the new landscape means for their businesses.

"London represents the largest market for euro-denominated trading, and major banks with euro trading desks in London may find that they need to relocate some of these functions to office markets within the EU. While this does not necessarily mean a wholesale relocation, we should expect some vacant space from banks to come to the market once this restructuring has taken place.

"However, it should be noted that many businesses with a large London presence are focused on markets outside the EU, and the UK’s exit from the Union will have a limited impact on them. The referendum, and possibility of Brexit, has been a live risk since the Conservative victory in the general election in May 2015. Since the general election, there has been above-average office take-up suggesting firms have adopted a business-as-usual approach; global operators such as Deutsche Bank, Thomson Reuters, Ashurst, Google and Facebook have made significant long-term commitments to London.

"There is likely to be some release of office space as businesses tighten their belts to weather the period during which trade treaties are being negotiated. However, currently availability levels are particularly low and the development pipeline remains fairly limited. The market has capacity to absorb a rise in supply before there is a possibility of a fall in prime headline rents. The impact on the investment market is likely to be less obvious. While the economic uncertainty during our exit negotiations will undoubtedly deter some domestic investors, the relative discount available to purchasers in foreign currencies will attract significant interest.

"In the medium-term however, Central London commercial property will continue to offer a higher yield than most other asset classes, and may even benefit from the instability in the equity markets."

David Sproul, chief executive of Deloitte UK: “The British public have spoken and made clear that they see the UK’s interests best-served by leaving the European Union. While the UK has opted for a future outside the EU, Britain remains a competitive, innovative and highly-skilled economy and an attractive place for business. However, as indicated by today’s market volatility we are likely to see a period of uncertainty. Businesses need to ensure they are set up to navigate the immediate risks and impacts of an exit, and have the processes and people in place to manage a period of upheaval.

“Against this backdrop of uncertainty, British businesses must continue to be proactive in finding ways to raise productivity and drive growth. The UK remains a world leader in R&D and a hub for innovation. This will help businesses capitalise on the opportunities and respond to the competitive threats created by the leave vote. They must also play an active role in setting a vision for a new, post-EU environment which is open, pro-growth and delivers prosperity and opportunity for all.”

Ian Stewart, chief economist of Deloitte UK: “Negotiating and implementing Britain’s withdrawal from the EU is huge task. But in tackling it our nation can draw on great strengths. The UK is in the top tier of the world’s most competitive economies. We have strong institutions and a highly skilled workforce. Our economy is a magnet for inward investment and enjoys one of the lowest unemployment rates in Europe. The UK faces a period of uncertainty and of great change. But the resilience and dynamism of our economy and institutions will be huge advantages as we start to navigate a prosperous future outside the EU.”

David Savage, partner within the construction team at law firm Charles Russell Speechlys: “The impact the leave vote will have on the UK construction industry is at this stage largely unknown. The mechanism for leaving the European Union involves a minimum of two years’ negotiation between the UK and the EU on Britain’s exit terms. Therefore, during this period there will be significant uncertainty in a number of areas within the construction industry.

“The UK construction sector has always relied heavily on workers from outside the UK to fill both skilled and non-skilled roles. Under current EU treaties, workers in member states can travel freely to the UK in order to seek work, with no work permits or visas currently required. The Brexit vote could lead to a shortage of skilled workers that would create significant uncertainly in the market, as there is a chance it may lead to an acute skills crisis. Given the importance of access to labour and flexible working, the construction industry may stand to lose more from Brexit than any other industry.”

Melanie Leech, chief executive of the British Property Federation: "The effect of the result has been immediate, and we are already seeing market turbulence and a fall in the pound. The priority for the government and the Bank of England must now be to stabilise the position and maintain confidence in the UK.

"It is now clear that there will be political changes ahead, but we will continue to work in partnership with government and other stakeholders so that the real estate industry, which is a considerable contributor to UK GDP, can continue to support the economy and create great places.

"The negotiation process is going to be long and complicated, and there will be many unknowns ahead. Our priority is that the government maintains focus on existing national priorities such as housing and that it makes decisions on major infrastructure projects, such as airport capacity and maintaining momentum around HS2, swiftly."

Andy Martin, senior partner at Strutt & Parker: “I am personally disappointed because I do not think there has been a case made to say what it means in terms of the governance, the running of the country and the changes in the legislation we would want to see. It is going to cause a huge amount of disruption to the markets while everybody takes stock of what it actually means and the government starts giving us clear policy direction. Before then we are going to have volatility, which is a risky thing to have in these markets because economic performance is still not something that is a given.

“As a firm, we are market driven. The market has shown signs of volatility in the lead up to this vote. We have seen a real cutback in trading due to the uncertainty of this vote. What we are now waiting to see is how our clients and markets will react to this. I suspect that they will continue to tread with caution until they can see the outcome. We have already seen in the currency markets that this is the case, with sterling being marked down. Everybody will say that makes the UK cheaper but, at the same time, instability affects the confidence of markets. I suspect this will be the overriding factor for the next period.”

JLL: "The vote for Brexit brings a new dawn for Britain, with considerable uncertainty and no real precedent."

JLL UK CEO Chris Ireland: “Even if it is effectively ‘business as usual’ for the UK in terms of trade and legislation until 2018, such a major change will inevitably create uncertainty in the economy and real estate markets. In the event of a well-managed exit these impacts will be largely confined to the UK.

“In the short term we may see a weakening in occupier demand. The impact on rents may be limited by tight supply, but activity will be adversely hit while initial uncertainty about direction and timing continues. Investor sentiment may also remain subdued in the short to medium term. For property markets, the initial correction may be most severe but should be followed by an upturn as opportunities re-emerge in UK core markets and benefits of weak sterling are recognised. Sentiment and relative pricing will be key.

“Much will depend on the speed of negotiation, the wider political picture and whether a clear direction of travel and timetable for an EU exit is established early on.”

The following is a summary of our view of these based on expert analysis:

Property market impacts:

• Occupier demand will weaken in line with economic growth and declining business sentiment. The impact on rents may be limited by tight supply, but activity will be adversely hit.
• Investor sentiment will deteriorate further subduing capital flows in the short to medium term.
• There is likely to be a negative capital value adjustment over next two years (estimated at up to -10% with yields moving around 50bp). London sectors remain most vulnerable to correction given current keen pricing and their multinational occupier base.
• The residential market is expected to cool despite lower interest rates, but any correction will be mild, aside prime London values which are significantly more exposed
• For property markets, the initial correction may be most severe and followed by an upturn as opportunities re-emerge in UK core markets and benefits of weak sterling are recognised. Sentiment and relative pricing will be key.
• "Much will depend on the speed of negotiation, the wider political picture and whether a clear and favourable direction of travel is established early on."

Adam Challis, head of residential research at JLL: “The London housing market will feel the effects of the Vote Leave decision more deeply. The interconnected trading relationship between London and the rest of Europe means the implications are more complex. This will exacerbate the uncertainty for London’s homeowners. Paradoxically, investors may well identify opportunities in this market over the short-term, particularly international purchasers that can benefit from the currency arbitrage that has opened up by a weaker pound sterling.

“While the focus leading up to the Referendum has been on the UK's international trading relationships, we are deeply concerned that domestic politics will now be the key risk to the housing market. Regardless of the Referendum outcome, the UK has a deep housing supply imbalance and concerted attention from politicians to deliver credible, lasting solutions to the supply conundrum is desperately needed. Protracted infighting within the UK’s political parties will only harm the UK economy and any chance of a timely recovery from the expected economic slowdown.”

Ezra Nahome, CEO of Lambert Smith Hampton: “Today’s announcement is not what a lot of investors and developers will have wanted. However, while it’s true that investors dislike uncertainty – just look at how quiet the last few months have been - history tells us that changing markets provide opportunity.

“As politicians figure out what the consequences are, the lack of an obvious market consensus in the short term presents opportunities for those who know where to look. We saw it during the financial crisis a few years ago, when smart investors spotted undervalued assets and then benefited from strong returns as the rest of the market caught up.

“For anyone looking to take advantage of the opportunities that Brexit will inevitably present, I’d encourage you not to skimp on good due diligence or local market insight. Knowing your market will be more important than ever.”

Credit: CoStar