While the outcome of the UK’s referendum on membership of the European Union hangs in the balance and there is no shortage of ‘double if’ predictions, concerns are far more immediate in the real estate sector.

As was the case with last year’s Scottish independence referendum, the UK’s latest bout of political instability is most likely to result in a ‘dead quarter’ once investment volumes for the three months from April to June are totted up. Last year, the Scottish referendum slowed activity and depressed prices north of the English border, resulting in a short-term discount for investors before the market recovered. 

With less than two months to go until the UK’s vote, impact is already being felt. In the UK’s listed property sector, funds flowed out of UK financials in the first quarter of this year, with UK property “punished”, say analysts at JP Morgan.

Reluctance to commit to UK real estate deals until the outcome of June’s referendum is known appears to be the main symptom of 2016’s jolt to the system. IPE Real Estate knows of one German fund manager recently pulling out of a UK speculative development deal.

“It’s undoubtedly a quiet quarter,” says Kevin Cooper, co-head of London-based debt fund manager ICG-Longbow. “There was a point where people who had lost their shirts at banks were out raising capital – that’s stopped for now.”

The current, short-term uncertainty, Cooper says, will ultimately make the market “more difficult for new entrants”.

The sit-and-wait approach of global investors – particularly of Asian players – is impacting not only on the UK but also on continental Europe, one agent told IPE Real Estate. “We know of Chinese buyers being reluctant to commit to any deals until the outcome of the referendum is known,” he says.

Mark Ridley, chief executive of Savills UK and Europe, says that some investors are exercising caution before the outcome of the Brexit vote is known, while UK commercial real estate is already suffering from the uncertainty, according to advisory firm Cluttons.

“The uncertainty and nervousness being fuelled by the in-out EU referendum is impacting on the volume of property transactions,” says Faisal Durrani, the firm’s head of research.

The UK’s commercial property investment landscape, says Durrani, is being subjected to some “challenging headwinds”.

Uncertainty leading up to the June 23 vote is likely to have a “somewhat paralysing effect on investor decisions on UK real estate purchases,” says Standard & Poor’s credit analyst Marie-Aude Vialle.

“Should the country decide in favour of a Brexit, prolonged uncertainty during the exit negotiations may turn investor sentiment more negative.” 

Under Article 50 of the EU Treaty, such an outcome would result in a two-year negotiating period. If the UK were to vote to leave the EU, property values are likely to fall, Durrani says.

While the precise impact of Brexit is difficult to gauge, should it occur, it could have negative consequences for UK real estate, a report by Standard & Poor’s noted recently.

“The long-term impact would depend on how the exit is negotiated,” the firm says. “Nonetheless, the potential negotiation uncertainty could add to capital market volatility and create negative sentiment for real estate investment.”

In its April European Commercial Property Update, Capital Economics says there “may come a point at which a weaker pound entices foreign investors back into the market”.

Joe Valente, head of European real estate research and strategy at JP Morgan Asset Management, says: “In the months following a leave vote, there could be some fallout from the uncertainty caused. If the UK leaves the EU, then the greatest concern would be that investors would take vengeance on the EU and not the UK.”

Conversely, if the UK remains in the EU, there may be a rise in the value of sterling, which could make the UK look a lot more expensive than it is now to international investors, Durrani says.

Ridley says that a combination of high allocations to UK real estate, strong sentiment among investors, record levels of occupier demand, falling supply and rental growth could all combine to see investors return to the UK market “with a bang post-referendum”.

“Typically, even in non-election years, the second six months of the year are busier for investors than the first,” he says. “But even taking this into account, we’re expecting to see a very significant uplift in activity on account of the UK’s safe and stable market.”

In a ‘Keep the Faith’ in listed UK property report, analysts at JP Morgan note that, should the Brexit risk pass, the second half of this year could be “an opportunity for large-cap UK REIT outperformance”.

Manish Chande, senior partner at Clearbell, a London-based private real estate fund manager, says that while some are concerned about the impact of the referendum on UK property, in the short term the current uncertainty is creating buying opportunities in real estate.

“We are confident that in the long term the attractiveness of the UK will remain, and that those who identify buying opportunities now will benefit over the long term,” he says.