This article was published prior to the publication of the post-Brexit agreement between the UK and EU which covers the relationship between the UK and EU following the end of the implementation period (commonly referred to as the “transition period”) created by the European Union (Withdrawal Agreement) Act 2020, and should be read in that context.
The historic decision has been made, and whilst the political ramifications are unfurling, the key message to the markets is that Britain can weather the storm.
Immediate Impact on UK Real Estate
An immediate slowdown in housing market transactions is predicted (by Mark Elliott of JLL) potentially in the order of 10% - 15% resulting in a downward pressure on prices in the short term.
According to Forbes, "there’s little doubt that investors expect a negative impact on real estate in the immediate future — British house-building companies such as Taylor Wimpey, Persimmon, Barratt and The Berkeley Group saw dramatic falls in share values as the financial markets started trading immediately following news of the referendum results. Whilst there are small rallies in share values since the initial shock, shares are (at the time of writing) still in the region 30% down since pre-referendum levels. Economists say that this is "consistent with a 5% fall in house prices next year".
A Brexit survey carried out by KPMG ahead of the referendum revealed that two-thirds of global real estate investors would personally cut back investments in UK property and property companies in the immediate aftermath of a ‘leave’ vote in order to avoid uncertainty around Britain’s economic path.
The Guardian reports that home-buyers have been initially spooked, and many are pulling out of deals, exercising "Brexit clauses" or looking to renegotiate the price.
The London Office Market
The London office market is expected to be affected more than any other property sector, as domestic and international companies reconsider the size and cost of their headquarters in the UK capital.
The UK's credit rating has been downgraded from its AAA status, and banks have reportedly begun moving operations to other European centres, including Paris, Dublin and Frankfurt (as reported by the FT on Saturday 25 June). HSBC has announced that up to 1,000 staff will be moved from London to Paris if the UK left the single market and the EU is preparing to relocate the European Banking Authority either to Paris or Frankfurt. JP Morgan has confirmed that roles may move out of the UK in the months ahead, whilst Morgan Stanley denies that it has started the process of moving staff even though some roles may be relocated in the near future.
The Longer Term Picture
The initial shock is predicted to subside quickly if negotiations with the EU commence promptly and openly. That said, the unfolding political crises in the UK and Europe, combined with the very real prospect of a general election and second referendum on Scottish independence suggests that EU exit talks may be slow to commence, and once started, protracted and painful. There are open fears among commentators that Britain will be "punished" during EU trade negotiations as a clear deterrent to other EU member states looking to follow the UK's lead. Angela Merkel has ruled out informal negotiations, but accepts that the UK needs time to formally commence the Article 50 exit process.
Carla Passino predicts that "after the confidence shock subsides, the real estate market will face fresh issues. The devaluation of the pound could trigger inflation and a rise in interest rates, which would in turn erode disposable income and depress the housing market, especially if coupled with declining house prices and job losses."
James Roberts, chief economist at Knight Frank, reminds us that the UK still has a resilient economy. He told Forbes:
"We see the referendum’s effect on the UK as consisting of a high-speed mini economic cycle"
"In the coming weeks, a combination of falling sentiment and those investors who are over extended having to sell, will result in some disposals which will be likely to weigh on asset prices. This we see coinciding with a devaluation of the pound."
"By the summer of 2017" Roberts continues, "the re-emergence of inflation will push investors towards growth assets [such as real estate]. And a clearer idea of the state of the British economy and the UK’s commercial relationship with the European Union, could push asset prices for the more robust sectors back to roughly where they were before the referendum."
The Rise of the Regions?
The regions had hitherto been enjoying a surge in demand and prices almost in direct correlation with the slow-down in the London market during the build up to the EU referendum. Fears of continued stagnation in London may re-direct investors and developers towards other regional centers such as Bristol, Birmingham, Manchester and Leeds.
A Brexit Bounce?
Despite concerns over the political and financial volatility of post Brexit Britain, the fall in the value of sterling will make our assets cheaper for overseas investors. Anna White at the FT predicts an increase in overseas investment - "the big irony of the leave campaign" according to Anna White, is that instead of reducing foreign influence, the leave vote will trigger a "Brexit Bounce" fuelled by overseas funds and private buyers. The slow down during the build up to the referendum has led to pent up demand, which will be ready to react swiftly to a price correction.
Price Correction
This "bounce" may be mitigated by overseas lenders' concerns over the long term stability of the UK economy. A major Singapore bank has today suspended loans for the purchase of UK property
The Rental Revolution
Originally fuelled by excessive house prices in London, the "rental revolution" coined the phenomenon of young millennials and cash-strapped professionals turning away from traditional home-ownership ambitions. A post-Brexit reduction in house prices might, in turn, reduce rental demand. But if interest rates are likely to rise, and banks tighten their lending criteria in the referendum aftermath, the need for rented accommodation will remain strong. We might therefore see the emerging "build to rent" sector thrive in an independent Britain. It would be good to see new and exciting operators like The Collective, and Pocket Living come into their own.
Opportunities
A sudden re-calibration of our politics, our economy and our society has already begun, but out of the chaos opportunities will no doubt emerge.
Braver investors will make the most of falling real estate prices, overseas speculators will make the most of the lower value of sterling, and inflation will, in the longer term, improve the attractiveness of real estate as an inflation busting growth asset class for investors.
Regional centres may also benefit from a re-balancing of the power and influence of London, with a refocus of priorities away from the continued development of luxury high rises in the capital, and instead, towards the promotion of local housing, investment and infrastructure to support those who are living and working in the UK. I hope that the emerging build-to-rent sector will thrive in a post-Brexit Britain, as the "rental revolution" continues to gain momentum.
