In four days’ time, the UK will decide whether it wishes to leave or remain in the European Union, and with the possibility of a Brexit, there has been much speculation as to the likely outcome of the vote and implications for the UK economy including, of course, the UK property sector.
The UK Property Sector – Legislative Framework Despite the wide-ranging influence of EU legislation on the national laws of member states, property law for the most part falls within the scope of national oversight. Consequently, should the UK vote to leave the EU there are few legal repercussions for the UK property market, with the exception of certain areas such as investment fund regulations and planning requirements that fall within the EU regulatory framework. Overall, the outcome of the referendum has wide implications for UK economic performance, and the property sector is likely to feel the impact of these, both in the short and long term.
Uncertainty – The Investor’s Stumbling Block For those working in the UK property investment sector, the biggest concern in the run up to the referendum is uncertainty and the instability that a Brexit might bring. Anecdotal evidence, now being backed up by formal studies, suggest some restraint amongst real estate investors, especially in relation to commercial property, which may translate into a short-term hiatus in investment. Research shows that investment into the UK property market dropped by 25% between the first quarter of 2015 and the first three months of 2016, owing to a combination of factors including a potential Brexit.1 So should the preference be to ‘sit tight’, some investment decisions may be deferred until the votes are counted and the true implications of the result understood.
Foreign Investment – Outward or Inward Flow According to some analysts, a Brexit is likely to entail an “immediate and simultaneous economic and financial shock for the UK, due to an expected drop in business investment, hiring and confidence, cease in flow of capital into the UK and a sharp fall in the value of the Pound”.2 Accordingly, there is a potential for a fall in property prices, a drop in demand by occupiers for space (partially as a result of even greater restrictions on immigration), and a potential change in the UK’s status as a major financial hub.
Research by Knight Frank LLP suggests that 49% of investors in the central London commercial and residential property markets are foreign investors. Frequently perceived to be a ‘safe haven’ asset, the London property market is therefore a key target for foreign direct investment. There are concerns that, should the UK vote to leave the EU, further inward investment and flow of capital may be deterred. A KPMG poll of 25 global real estate investors revealed that two thirds are of the opinion that a Brexit would result in reduced investment in the UK property market. This is likely to affect both the price of properties and the volume of transactions in the market.
In the run up to the referendum the pound has suffered a dip in value, and its value might fall further in the event of a Brexit, and this could result in a consequent, albeit temporary, slower rate of GDP growth. The knock-on effect of this could go two ways. The first possibility is that the market becomes unattractive as a result of the devalued currency, property prices fall, and there is a potential reduction in the value of real estate assets. However, the alternative assumption is that even if property market transactions stall for a time, it is likely that in the longer term a fall in the value of the pound would be beneficial and attractive to potential investors who may wish to take advantage of lower property prices
Demand and Supply The interaction of market forces affects demand and supply for property, especially with regard to the accessibility of the UK property market. Where entry and exit into the market become cumbersome, there is a possibility of investors diverting into other markets. The most vulnerable property sectors currently include central London commercial properties and offices, residential buildings, student accommodation, and properties in the South East, although the market in other major cities in the UK may also experience similar effects. A Brexit could impact on whether international and European companies, banks and other financial institutions relocate their operations away from the UK; and in the event of a Brexit, other industries and sectors looking to open a new plant or operations site would also weigh the benefits of the UK v the EU. A reluctance to continue or increase UK operations in order to benefit from the EU free trade zone could result in decreased demand for UK commercial property. Consequently, a fear of jobs streaming from the UK market into what remains of the EU could also result in lower demand from tenants, a factor which is crucial for most investors’ decision to invest.
On the other side of the coin, property developers who have subcontractors and employ construction workers from Europe could experience a crisis within the supply chain, as a Brexit has implications for the free movement of goods and services between the UK and the rest of the EU. Restrictions on migration and more stringent export and import conditions as a result of secession might lead to a further shortage of labour and associated increased costs of construction in the property sector.
Conclusion The discourse surrounding the UK’s upcoming referendum on EU membership increasingly focuses on the adverse effects it poses. The UK, and especially London, is a prime target for overseas real estate investment capital. In the event of a Brexit, there is no doubt that there will be a significant impact on the UK economy and consequently, the UK property market, the extent of which is not quantifiable. While there is likely to be a reduction in the value of the pound and a resulting reduction in the price of certain assets, some uncertainty is unlikely to deter investors. Investors and developers will however be wary of the volume of transactions within the property market, and confidence to invest in a market that is potentially open to threats will be low. Nevertheless, there is a potential for further future investment and the UK property market should at least remain attractive to long-term if not short-term investors.While a long period of uncertainty does not bode well for property investors and developers, the belief is that the fears and uncertainties surrounding Brexit should primarily be short-lived. Overall, the effect on the UK property market is not so much as a direct result of whether the UK exits or remains in the EU, but the uncertainty and related inactivity that ensue.