The British vote to leave the European Union after more than four decades of membership has sent shockwaves through continental Europe and parts of the UK today. As experts deliberate what this could mean for both the UK and the EU going forward, London-based firm Blackstock Consulting takes a look at what the UK’s shock exit could mean for property.
‘The mood in London is of shell shock,’ Andrew Teacher, managing director of Blackstock, told PropertyEU. ‘Investors may now look at REITS that grant them access to defensive asset classes that are less volatile than offices, such as student housing and healthcare. That flight to safety will create winners and losers.’
In addition, London office rents could be hit, not least because ‘they are already at all time highs,’ according to Teacher. ‘If rents fall, they would in turn affect valuations which have been largely based on very positive – and some would say unrealistic – leasing outcomes,’ he said.
City landlords will undoubtedly also be having anxious meetings with their banking tenants after banking stocks plummeted 35% within minutes of the London Stock Exchange opening this morning. They have since rebounded slightly, although many, including Barclays Bank, were still down 20% at 11:00 BST today. The 2.2 mln workers in the City of London’s financial services sector will understandably be worrying whether their jobs will be safeguarded. However, according to Blackstock, one upside may be that small and medium-sized enterprises (SMEs) could find office space more affordable as a result.
Bank and property stocks are always the first to tumble in a crisis, just as they did in the aftermath of the collapse of Lehman Brothers in 2008, because they are the two key sectors underpinning the economy. Subsequently, REITs and FTSE-listed companies will suffer as stock markets ‘jitter around like a heart monitor’, according to Teacher. However, even though share prices are down between 15% and 25% for house builders and REITs, these prices remain well above the 2008 trough, he says.
Falling in house prices
Another likely ramification is that house prices will fall in some areas as market confidence takes a beating. Even here, there is a potential silver lining: house prices could conceivably rise in other areas, including the Greater London area, due to the massive discount now available to foreign buyers, with the pound down 15% against the dollar.
The rental market in London could also see a fall in demand, although regional markets will probably escape relatively unscathed. International investors have been pumping more money into regional markets in the UK over the past 12 months and given that London’s safe-haven status has been damaged, at least in the short term, some international investors may move their ‘golden bricks’ elsewhere.
However, the lending climate will undoubtedly worsen. It has already been in limbo for several months and this is likely to deteriorate, resulting in stagnating deals, according to Teacher. Big agents were reportedly banning investment agents from taking holiday before August. This is likely now not to be the case.
The retail market also faces uncertainty. The rising cost of goods from the falling pound – and likely higher import charges for goods from the EU - will have a dampening effect on consumer spending. This could hurt retail valuations and rents.
In addition, EU nationals active in construction and concerned about their long-term work status may head back home, thereby compounding the shortage of skilled labour.
Scotland, which voted overwhelmingly to stay in the EU, could have another push at independence, which could stymie investment north of the border. Northern Ireland, which also voted to remain in the EU, may also push for a union with the Republic of Ireland.
British prime minister David Cameron’s resignation on Friday morning could unsettle policy-making providing opportunities and risks: it could mean a focus away from home-ownership at all costs and localism, two negative policy routes. Also, given the position some Brexiteers have taken, it could make Britain more insular and put off investors, according to Blackstock.
