Germany could have upper hand post-Brexit

Growing fears of a Brexit could catapult more investors into Germany, which has cemented its safe haven status in recent weeks as uncertainty regarding the UK’s potential exit from the EU intensifies.

‘Germany could benefit from a Brexit in the short-term,’ said Robert Stassen, head of EMEA capital markets research at JLL. ‘A Brexit could increase its safe haven status. If a Brexit happens, it will mean disruption for the UK but the question global investors will be asking is: “What does this mean for cohesion in the EU?”’

If the UK does vote to leave the EU in the referendum on 23 June, we are in for ‘a choppy summer’, Stassen warns: ‘There will be a lot of volatility in real estate pricing, both in Europe and globally. It would be a systematic shock to the system with a ripple effect. Investors will take a wait and see approach.’

Rob Wilkinson, CEO of AEW Europe agrees: ‘German investors have invested heavily in the UK and I expect investors like that will hold back on making investments until the result of the referendum. However, a lot of eurozone investors don’t invest in the UK, as is the case with many of our French clients.’

The threat of a Brexit has also started to dampen the UK’s strong credit score, potentially pushing up the cost of borrowing, credit agency Moody’s warned this week. The pound has tumbled in recent weeks as support for a Brexit grows, pushing sterling to a seven-year low of $1.40 against the US dollar as well as weakening it against a basket of other currencies, including the euro, as spooked investors pulled capital out of UK assets. London mayor Boris Johnson’s decision to back the leave campaign has also put tremendous pressure on the pound, economists say.

If the UK does exit the EU, UK property – including listed firms – will undoubtedly take a hit, at least in the short-term. In a research note from Credit Suisse ‘Brexit: Breaking Up is Never Easy or Cheap’, analysts predict that the price of UK assets, particularly property, equities and gilts, will fall.

The referendum has repeatedly been called ‘too close to call’. So how likely is a Brexit? That is the $64 mln question that UK businesses, including property firms, are asking themselves. One thing seems certain: the likelihood of a Brexit is creeping higher, according to investment bank Citigroup, which has raised the probability of a Brexit from 20% to 30% to 30% to 40% after Johnson and the UK justice secretary, Michael Gove, announced their support for the leave campaign.

Another concern is that there is no clarity as to how UK companies will transact with eurozone ones after a Brexit, Wilkinson said. ‘Any new arrangements are not likely to be as convenient as the common market,’ he added.

In addition, a weaker pound would make exports cheaper, bringing in further growth which could push up interest rates, Wilkinson added. ‘They are starting from such a low point that even if they increase by 200 bps I don’t think it would impact much on the market. However, the market is also very sentiment driven, so that could push yields out if people are concerned by the disruption factor.’

Nonetheless, given that investors globally are estimated to have raised $250 bn of equity to spend on real estate, the market will bounce back due to the need to actually deploy the capital, Stassen said. ‘Real estate will still be an attractive asset class. It’s just a question of how long it takes the market to find a new equilibrium – and then capital will be investing again.’