Uncertainty remains around the form Brexit may take, and that uncertainty shows no sign of diminishing now that Brexit negotiations have started between the UK and the EU. Since the UK general election the government has been seeking an increased level of engagement with the business community, and that will (hopefully) have an important part to play in shaping the final Brexit deal.
So what are the possible implications of Brexit for your business? Here are four issues that we consider key for those in the Real Estate and Infrastructure sector.
1. Capital flow
Overseas interest in UK property investment continues to be strong, but it remains to be seen what financial barriers to free flow of capital may be set up if existing Single Market ‘passporting rights’ are lost. With the likely loss of passporting rights, it may not be as easy for UK real estate fund managers to market their products to EU investors – and so managers may become more reliant on UK capital, and may have to consider relocating part of their business to the EU in order to continue to take advantage of EU passporting rights.
2. Cost of construction
Any restriction on the free movement of labour is likely to exacerbate the existing skills shortages in the construction industry. This combined with other factors – ever-rising housing demand, a weak pound driving up the cost of importing building materials, and existing government commitments to various infrastructure projects – points towards a significant increase in construction costs. Developers and contractors will need to consider how they share that risk on projects which span the Brexit timetable, and developers acquiring sites will need to price for this variable cost risk.
3. Demand for space by corporate occupiers
Aside from any impact Brexit has on the UK’s wider economy and therefore underlying demand for space, we are already seeing reports of businesses across a number of sectors considering moving some or all of their business outside the UK. How this relocation trend unfolds largely depends on the post-Brexit regulatory framework for trade and free movement of people:
- Will there be tariff-free access to the EU market?
- Will the UK lose its passporting rights?
- What rights will EU nationals have to live and work in the UK?
Britain’s Brexit Secretary, David Davis, has reiterated his position that the UK will leave the Customs Union and the Single Market after March 2019. Regardless of which of the many possible over-arching trade arrangements apply in that event, how these questions are addressed will be of key concern to businesses which depend on access to the EU market and/or to free movement of workers.An additional thought: voids created by relocations may present opportunities for those looking at innovative ways to use space. This is a trend that has been developing quite separately from Brexit, driven by rapid advances in technology, changing occupier needs and the entrepreneurial outlook of those creating business projects centred on concepts such as co-working.
Another area of uncertainty is how EU cross-border transactions may be taxed after the UK leaves the EU and the current EU rules cease to apply. There will be the opportunity to change the UK VAT rules – although radical change would appear unlikely. For our more detailed thoughts on these and other tax implications, see here.