The clear-cut victory for the Leave camp in Thursday's UK referendum has left many of us in mainland Europe feeling stranded, disenchanted and somewhat apprehensive.
B-Day will no doubt go down in history as the mother of all anti-establishment votes, to quote Nicolas Spiro, partner at Lauressa Advsiory. The Brits have done what most property professionals had thought was impossible just a short time ago. They have rejected the virtually unanimous call by UK and global economists and business people to avoid this Rubicon-crossing moment for both British politics and the decades-long process of European integration.
The domestic and international political and economic ramifications of a Brexit are profound and represent one of the most severe shocks for global financial markets in recent memory, Spiro claims. It forms a huge risk for the UK economy, agrees Jeppe de Boer, founding partner of Masterdam, an independent real estate corporate finance firm in Amsterdam. The OECD estimates that British households will be $3,200 worse off by 2020 as a result of Brexit, he writes in a commentary.
Financial markets across the world plunged on Friday morning following the result of the referendum and economists and property leaders are now forecasting a period of extended uncertainty. 'The property sector has probably followed the EU referendum more closely than any other industry and has witnessed the impact of the uncertainty and speculation in the run up to the vote,' John Forrester, EMEA CEO of Cushman & Wakefield, said in a comment.
‘While the decision of the UK electorate is now confirmed, a period of further uncertainty is unavoidable as businesses, the financial markets and the political establishment in the UK, Europe and globally come to terms with what this means.'
Currency effect
Looking beyond the knee-jerk market reaction, the referendum result is likely to lead to renewed market activity in the property sector, some industry watchers claim. The first half of the year has been characterised by a wait-and-see attitude, with many investors delaying decisions until after the vote and a consequent decline in transactions. Now activity is likely to pick up quickly, as many investors seek to take advantage of the fall of the pound to make acquisitions.
‘For overseas buyers, this big and dramatic drop in the value of sterling will effectively offset the stamp duty and tax adjustments and it will make prime London property a lucrative investment for overseas investors bold enough to take a punt despite the market uncertainty,' according to Peter Wetherell, CEO of London-based residential agent Wetherell.
But some deals that had been negotiated will collapse, as they contained a 'Brexit clause' that makes them void in case of a decision to leave the EU. JLL is forecasting that 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.
Overall, investor sentiment will deteriorate further subduing capital flows in the short to medium term, JLL UK CEO Chris Ireland commented. JLL is forecasting a negative capital value adjustment over the next two years estimated at up to -10% with yields moving around 50 basis points.
One of the key questions many property professionals are asking is what the impact will be for London which is the key target for foreign real estate investors. On the positive side, the retail sector and the residential sector in London are likely to benefit from bargain-hunting investors taking advantage of the fall in the value of the pound. The hotels sector will also thrive as tourist numbers rise because of a weaker sterling.
London will be adversely hit
On the negative side, the office sector in London and particularly in the City is likely to be adversely hit as many banks and financial institutions have warned that they might scale back their presence in the UK and move to other European capitals to remain in the single market.
'We have been working on a number of deals, across several asset classes, ranging from student accommodation to residential development, which we expect to take forward now that a decision has been made,' said Mark Clacy-Jones of Investec Structured Property Finance. 'With the pound likely to continue to lose value over the next six months, coupled with a likely fall in real estate values, we anticipate renewed interest from sovereign wealth funds and private equity houses which will see new value and opportunities in our property market.'
Hermes' chief economist Neil Williams noted that equities and the pound may remain vulnerable given the likely hit to UK growth, and risk now of weaker ties with the country's main trading partner. He also expects 'a diluted relationship' with the US and other third parties that use the UK to access the single European market.
'The UK economy will of course "survive", given its entrepreneurial flair, increasing focus on non-EU trade, and likely policy accommodation by the Bank of England and UK Treasury. However, getting to the next stage looks a long, drawn-out "can of worms", leaving considerable uncertainty for UK assets and markets. The extent of this damage now rests on the manner of the exit.'
Hard or soft exit?
Williams expects the mark-down on assets will be greatest in the case of a ‘hard exit’ - entailing an acrimonious departure, lower trade, lower migration, and recession - than the more probable 'softer' version. 'But, even a "soft exit" to a Norway or Switzerland-style associate membership will probably need several years just to end up close to "square one". Greenland's soft exit in 1985 had taken three years. We, larger and 43 years entwined in the European project, will need even longer.'
Amid all the uncertainty, one thing appears clear, according to Hermes' CEO Saker Nusseibeh. 'In any case we know that we are now in an even more prolonged super-low interest rate environment outside of the UK, with the US likely to delay its decision to raise interest rates even further out.'
Another known amid the multiple unknowns is that City landlords will soon be having nervous meetings with their banking tenants.
And that B-Day may well come to be known as V-Day for Boris Johnson.
Judi Seebus
Editor-in-Chief PropertyEU
