COMMENT: The Waiting Game

As the Brexit referendum draws closer, the question is whether UK property market players will spectate rather than activate, says Ben Clarke, Head of UK Research at Cushman & Wakefield, in this commentary.

Now that we’re a few more weeks into the Brexit referendum debate, the sensationalism and scaremongering on both sides has, predictably, stepped up another gear.

However, the impact on the property community is still difficult to pin down; indeed, the buildup to the referendum has come at a time in the cycle when investors would expect to pause for breath anyway. On top of that, 2016 has so far proved more turbulent than many were expecting. And while the prospect of a Brexit is certainly another key risk factor to throw into the mix, disentangling all of the causes and effects on the property market is a challenge.

Among all of this, the pound has fallen sharply to reach a seven-year low against the US dollar. The broader trade-weighted value has also come down by 5% since the beginning of the year, which reflects the market perception both of risks arising from a Brexit and an increased probability of this actually happening. The situation does provide an attractive discount for opportunistic overseas investors though, especially if you believe a vote to stay or leave would have broadly similar economic consequences over the longer term.

Quieter first half on the cards
It wouldn’t be surprising to see a quieter first half of 2016 for both occupiers and investors - particularly in Q2, as people sit on their hands and wait to see what happens. Though of course, if Brexit is rejected, there is likely to be a 'relief bounce' in activity in the second half of the year.

The real likely cost – as my colleague David Hutchings noted in the first blog of our series, 'The Brexit Hokey Cokey' – is the messy and expensive divorce a vote to leave would embroil us in. While EU treaties allow for a two-year window to negotiate an exit, what the actual timeframe would be is anyone’s guess. A longer period of uncertainty would reduce liquidity, yielding negative consequences for values in the short term.

Nevertheless, the wider aspects that make the UK attractive to invest in – a well-established and well-regulated, highly liquid market with a broad range of investor groups – will continue to be the case in the long run, whether the UK votes to leave or stay in the EU.

For UK occupiers the most pressing issue in the event of a Brexit will be the prospect of a change in the laws and rules that govern them. The trading ability of the UK is likely to be reasonably robust in either situation, but the potential risk of increased administration costs in the short term is considerable. The flip side to this is the lower administration burden over the longer term, which is the argument put forward by the exit lobby.

In the regional UK office market, organisations that use their regional presence as a platform for trading across Europe are likely to wait and see before any investment decisions are finalised, with examples including innovation and research & development in the automotive and healthcare industries. There is also potential for longer term restrictions on the freedom of movement of key personnel from mainland Europe affecting a broader cross-section of organisations. Given the business agglomeration and support structures surrounding such specialist centres, the longer-term effects could lead to a reduction in occupier demand.

In the industrial markets, demand for manufacturing space has been trending downwards. In part this can be attributed to the drop in global trade. But, increasingly, the prospect of a Brexit and associated unknown new trade agreements could make a global corporate think twice before locating in the UK rather than an EU-based alternative.

Uncertainty is a key factor for most issues facing occupiers and investors at the moment. Even though the arguments for and against Brexit will get more charged, the good news is that, over the coming months, we’ll be moving closer to a known outcome on this issue. And that’s one thing they can tick off their lists at least.

Ben Clarke
Head of UK Research, Cushman & Wakefield