Brexit 'could do real damage to the property industry in London'

The uncertainty about the result of the vote has already led to a marked slowdown in transactions and, in case of a vote to leave the EU, this ‘wait and see’ attitude is likely to continue for a long time as complex negotiations get under way. This was the consensus view of a panel of experts gathered in London by AEW Europe for a debate on the possible risks and potential real estate market impact of Brexit.

‘Brexit is a huge concern,’ said David Ainsworth, Chief Executive of City Offices Real Estate. ‘There is a real risk of complacency that London will remain great no matter what, but it is more vulnerable than we think. It was in a very bad place in the late ‘70s and it could go into decline again. Years of uncertainty would destroy a lot of value, undermine the strength of London and do real damage to the property industry.’

The paralysing uncertainty seen over the last few months could last for years: ‘The majority of our clients believe Brexit would be detrimental to their business,’ said Mark Payne, Partner at Clifford Chance in London. ‘The flow of new transactions has already slowed down, and we anticipate that the uncertainty may well continue for at least 5 to 7 years after the vote. Let us remember that EU negotiations with Switzerland took over 8 years, those with Canada 7 years.’

London’s safe haven status and reputation for stability which have attracted foreign investors could be undermined, warned Oliver Jones, Equity Analyst, Europe at AEW Europe Real Estate Securities: ‘If the UK leaves that will be lost and it will put off international investors, despite the country’s other advantages like rule of law.’

The office sector is the most exposed, as international banks and financial services companies could downsize or relocate if the Out vote were to win. Retail and logistics have a more domestic focus and would suffer less in the immediate aftermath, but if the British economy were to slow down, as many experts predict, then they too would be impacted by the negative ripple effect.

Much of the focus has been on the potential negative impact of Brexit on the City and on London, but the UK’s regional cities which have lately seen an increase in investor interest would suffer too. Until now the rest of the UK has been impacted less by Brexit fears, but there are reasons to fear that if the UK were to leave the regional cities and economies would be more damaged than London, because the local economy depends more on being part of the EU.

Some of the negative effects on the market seen in the last few months and attributed to the referendum might just be due to the stage in the cycle, as the UK and London in particular have had a pretty good run in the last few years. ‘Rents have already risen significantly, prices are high, so it is hard to judge how much of it is Brexit and how much of it is the point in the cycle,’ said Ainsworth.

In both cases the market reaction will be immediate, the panellists agreed: in the case of a Brexit UK property stocks would fall along with sterling the day after the referendum, transactions would freeze and there could be a correction in rents.

If the Remain vote wins, there will be an instant spike in financial markets, with office-focused stocks benefiting the most. ‘There will be a quick bounce in activity and a lot of pent-up occupational and investment demand may be released, but possibly not a bounce in values because valuations haven’t really fallen so there is no price correction to make up,’ said David Hutchings, Partner, Head of Investment Strategy, EMEA Capital Markets at Cushman & Wakefield.

As the referendum is at the end of June, a pick-up in transactions may not be noticeable until after the summer lull but it will surely come, Payne said: ‘In the event of a vote to Reamin, there will be more transactions, although maybe not immediately because of the timing of the vote. But we would be expecting a very busy autumn’.

(Photo by Jeff Djevdet via Flickr)