EU exit and property latest 24th June 2016

The UK electorate has spoken and it has chosen to leave the EU, a vote many in the commercial real estate industry have dreaded. Hopes of a speedy second half bounce-back in transactions on the back of a remain vote have been immediately extinguished and there is much concern about the period of uncertainty that comes now as the UK redraws its position on the global stage. That said the property industry has had plenty of time to prepare itself for this eventuality and is already providing level headed advice as to how to respond in order to survive and prosper. CoStar News catches up with key players to ask what now for the industry?

Where-ever your sympathies lie on the EU, there is no doubt last night's vote was a momentous one for the UK and Europe and the turmoil it has initially prompted in the financial markets as well as the sight of plummeting sterling value charts is causing alarm across the property industry. That said there are many who will see opportunity in the near and medium term. Below CoStar News has compiled the initial thoughts of senior industry figures.

Colin Wilson, Cushman & Wakefield, head of UK and Ireland, said: "There has been a clear direction in recent weeks of this being on a knife-edge but the feeling yesterday evening was that it would be a remain vote just so many will be waking this morning suprised and shocked. The issue now is the debate has been highly charged and emotional and we now need to take the emotion away and as an advisory business take note of the main markets response and the political reaction and then advise our clients accordingly. The reaction is likely to be extreme today given this is a response to a one-off event rather than a gradual development as with the GFC. We will need to be balanced, pragmatic and prudent before providing the appropriate response."

John Forrester, EMEA Chief Executive of Cushman & Wakefield: “The property sector has probably followed the EU referendum more closely than any other industry and has witnessed the impact of the uncertainty and speculation in the run up to the vote.

“While the decision of the UK electorate is now confirmed, a period of further uncertainty is unavoidable as businesses, the financial markets and the political establishment in the UK, Europe and globally come to terms with what this means.

“Clearly the impact of this decision will be felt beyond the UK’s shores as the UK is the EU’s third largest market by population. We are therefore entering a period of unprecedented change as markets and sectors adapt. What is clear is that in any scenario there will always be opportunities and those will become clear in the weeks and months ahead.”

Andy Martin, senior partner at Strutt & Parker said: “I am personally disappointed because I do not think there has been a case made to say what it means in terms of the governance, the running of the country and the changes in the legislation we would want to see. It is going to cause a huge amount of disruption to the markets while everybody takes stock of what it actually means and the government starts giving us clear policy direction. Before then we are going to have volatility, which is a risky thing to have in these markets because economic performance is still not something that is a given.

“As a firm, we are market driven. The market has shown signs of volatility in the lead up to this vote. We have seen a real cutback in trading due to the uncertainty of this vote. What we are now waiting to see is how our clients and markets will react to this. I suspect that they will continue to tread with caution until they can see the outcome. We have already seen in the currency markets that this is the case, with sterling being marked down. Everybody will say that makes the UK cheaper but, at the same time, instability affects the confidence of markets. I suspect this will be the overriding factor for the next period.”

Manish Chande, senior partner at Clearbell: “We have always been confident that the UK would remain attractive to real estate investors over a long term horizon, regardless of EU membership. The decision to leave the EU may create some short term volatility and cause some investors to put decisions on hold. But we saw during the referendum campaign that this created buying opportunities at significant discounts for savvy investors. As the uncertainty gradually lifts and investors are reminded of the strong fundamental factors that make UK real estate attractive, we’d expect real estate activity to pick up."

JLL said: "The vote for Brexit brings a new dawn for Britain, with considerable uncertainty and no real precedent."

JLL UK CEO Chris Ireland: “Even if it is effectively ‘business as usual’ for the UK in terms of trade and legislation until 2018, such a major change will inevitably create uncertainty in the economy and real estate markets. In the event of a well-managed exit these impacts will be largely confined to the UK.

“In the short term we may see a weakening in occupier demand. The impact on rents may be limited by tight supply, but activity will be adversely hit while initial uncertainty about direction and timing continues. Investor sentiment may also remain subdued in the short to medium term. For property markets, the initial correction may be most severe but should be followed by an upturn as opportunities re-emerge in UK core markets and benefits of weak sterling are recognised. Sentiment and relative pricing will be key.

“Much will depend on the speed of negotiation, the wider political picture and whether a clear direction of travel and timetable for an EU exit is established early on.”

The following is a summary of our view of these based on expert analysis:

Property market impacts:

  • Occupier demand will weaken in line with economic growth and declining business sentiment. The impact on rents may be limited by tight supply, but activity will be adversely hit.
  • Investor sentiment will deteriorate further subduing capital flows in the short to medium term.
  • There is likely to be a negative capital value adjustment over next two years (estimated at up to -10% with yields moving around 50bp). London sectors remain most vulnerable to correction given current keen pricing and their multinational occupier base.
  • The residential market is expected to cool despite lower interest rates, but any correction will be mild, aside prime London values which are significantly more exposed
  • For property markets, the initial correction may be most severe and followed by an upturn as opportunities re-emerge in UK core markets and benefits of weak sterling are recognised. Sentiment and relative pricing will be key.

"Much will depend on the speed of negotiation, the wider political picture and whether a clear and favourable direction of travel is established early on."

Adam Challis, Head of Residential Research at JLL: “The London housing market will feel the effects of the Vote Leave decision more deeply. The interconnected trading relationship between London and the rest of Europe means the implications are more complex. This will exacerbate the uncertainty for London’s homeowners. Paradoxically, investors may well identify opportunities in this market over the short-term, particularly international purchasers that can benefit from the currency arbitrage that has opened up by a weaker pound sterling.

“While the focus leading up to the Referendum has been on the UK's international trading relationships, we are deeply concerned that domestic politics will now be the key risk to the housing market. Regardless of the Referendum outcome, the UK has a deep housing supply imbalance and concerted attention from politicians to deliver credible, lasting solutions to the supply conundrum is desperately needed. Protracted infighting within the UK’s political parties will only harm the UK economy and any chance of a timely recovery from the expected economic slowdown.”

Ezra Nahome, CEO of Lambert Smith Hampton: “Today’s announcement is not what a lot of investors and developers will have wanted. However, while it’s true that investors dislike uncertainty – just look at how quiet the last few months have been - history tells us that changing markets provide opportunity.

“As politicians figure out what the consequences are, the lack of an obvious market consensus in the short term presents opportunities for those who know where to look. We saw it during the financial crisis a few years ago, when smart investors spotted undervalued assets and then benefited from strong returns as the rest of the market caught up.

“For anyone looking to take advantage of the opportunities that Brexit will inevitably present, I’d encourage you not to skimp on good due diligence or local market insight. Knowing your market will be more important than ever.”

Alan Tripp, Head of UK, LaSalle Investment Management: “Earlier today, we learned the result of the UK referendum, with the British electorate voting to leave the European Union. This is likely to be followed by a period of uncertainty in the financial community.

“Whilst we view the long term impact of Brexit as being broadly neutral we expect markets to overreact in the short term. Early capital market signals seem to indicate that this may well be the case and real estate performance objectives may now come under considerable strain in the next 12 to 24 months.

“However, we have been working closely with our clients, adopting a balanced approach on risk, to streamline their real estate portfolios at this maturing stage of the cycle.”

Bilfinger GVA has responded to today’s EU Referendum vote to leave the European Union as a “significant market challenge” but said that it is well placed to respond to the adjustments that this vote presents.

Gerry Hughes, Chief Executive of Bilfinger GVA: “The decision of the electorate to leave the European Union presents a significant market challenge. Whilst any attempt to quantify the effect of the ‘leave’ vote remains speculative, the impact will undoubtedly be felt across all areas of our economy. Nevertheless, despite the economic uncertainly this decision creates, our advisory offer provides a stable platform from which to assist our clients in adjusting to this new market dynamic.”

“What is certain in the short term is that we will see a negative impact on trade volumes, foreign direct investment levels, exchange rates and borrowing costs. It is vital therefore that Government moves decisively to set out how the UK navigates through this new economic landscape, and so allows us to reach a more certain and stable outlook in the medium to long term.”

Bilfinger GVA believes the impact on the office market will vary considerably across sectors. 62% of respondents in Bilfinger GVA's internal staff survey conducted before the EU Referendum thought there would be a decrease in occupier demand for financial services, rising to 76% in London. Indeed, 75% of London-based respondents thought that Frankfurt’s threat as a competitor to the City of London would increase. Nationally, only 39% thought that demand for professional services would decrease.

"The retail sector will likely see some impact from a fall in consumer confidence in the short term. However, the structural changes still underway across this sector will continue to be the key driver.

 "The impact of the leave vote on the distribution sector is likely to be limited, as demand in this sector is being driven strongly by structural change in the domestic retail market. However, demand from manufacturing-led logistics and industrial space is likely to be impacted if trade volumes fall. 69% of respondents to the survey felt occupier demand in the manufacturing sector would fall; although only 39% saw demand for professional services, as well as TMT reducing, implying that these sectors remain more insulated from any impending effects of Brexit.

"The leisure sector may well benefit initially from this vote, as a probable fall in Sterling would increase the cost of holidays abroad. However, the sector may also experience a reduction in demand in the long term if economic growth slows.

"Greater UK control over immigration following the leave vote could make it harder for overseas students to access UK universities, affecting the high-end student accommodation market.

"The UK has already seen a slowdown in investment activity, as purchasing decisions are delayed until after the vote. Investment transactions for Q1 are less than £12 billion, the lowest since Q1 2014. Q2 will likely be even more noticeably down on last year."

Jason Sibthorpe, Senior Director and Head of Transactions and Capital Markets: “The leave vote will not change the fundamental benefits of investing in UK commercial property. While the continued uncertainty will likely have a minimal effect on the prime market, the secondary market remains at risk of a more prolonged slowdown, and a potential upward shift in property yields. This vote could cause UK gilt yields to rise, narrowing the gap with property yields.”

Sibthorpe added: “On the plus side, the likely fall in the value of Sterling will make UK property cheaper for overseas investors, who currently account for half of the value of commercial property purchases.”

Edward Cooke, acting chief executive at BCSC, said: “This result will clearly be disappointing for many people in the UK retail and retail property sector, leading to further uncertainty in the market and in the minds of consumers - when what we should be doing is encouraging more international and European investors and retailers into the UK.

“But change won't happen overnight. The prospects for the wider economy and consumer confidence will now depend in part on negotiations over the UK’s new status.

“We hope those negotiations happen quickly and effectively to create the right conditions for the retail sector to continue to deliver employment opportunities and invest in UK towns and cities, contributing to local economies and communities.”

Rob Thompson, Head of Real Estate London at Irwin Mitchell: "Britain’s decision to leave the EU is monumental. However, property law is not heavily influenced by EU legislation and, therefore, Brexit will be a market issue, rather than a strictly legal one. In recent months, the press has been awash with competing predictions about the impact of Brexit but the almost universal consensus of economists and property professionals is that leaving Europe will have an effect on transactional activity levels in the UK property market, at least in the short term.

"We are now entering an extended period of uncertainty whilst the government spends time negotiating its exit from Europe. The hope is that the UK can somehow negotiate the continued benefit of free trade whilst reducing its EU budgetary commitment and avoiding EU regulation and the requirements of the free movement of people. In short, the UK will be seeking a better deal than either the European Economic Area (as per Norway) or the European Free Trade Association (as per Switzerland) can offer. Sectors such as manufacturing, logistics and construction will also be concerned about the non-availability of foreign labour, on which they rely heavily.

"We have already seen a period of outflow from commercial property funds (February reportedly saw the largest monthly sell-off since 2008) and European banks, which hold a large volume of securitised debt, may start to divest themselves of some of this debt in response to Brexit. Overseas investor and developer confidence in the residential sector will also be affected and Brexit is likely to slow, if not stall, investment in new housing development and will probably disrupt the inflow of labour and materials to the UK. There are also broader economic questions around the effect of Brexit on currency markets and interest rates. These, too, will impact on the property market as much as any other.

"Many though are more optimistic and predict that, after a short term dip, the UK property market will thrive as trade is boosted due to the removal of import tariffs and the dumping of regulations. Opportunistic investors will no doubt look to take advantage of uncertain market conditions to extract greater value on acquisitions.

"On top of this, we should not lose sight of the fact that the UK is an incredibly resilient and adaptable economy and it is difficult to see how the City of London will not continue to remain as one of the leading financial centres of the world. The UK is also a major focal point for the technology industry and companies exposed to this sector are much less likely to be affected by the implications of Brexit.

"So all is not doom and gloom - the English legal system and the transparency of the UK property market will continue to be the envy of the world and it is difficult to see why international capital will not continue to find its way into the UK property market after an initial period of reflection and evaluation."

Patrick Scanlon at Knight Frank said: "The vote to leave the European Union creates both threats and opportunities for the Central London office market. Economic uncertainty is rarely a positive for any market, and in the short-term we should expect some occupiers to delay committing to new office moves as they take stock of what the new landscape means for their businesses.

"London represents the largest market for euro-denominated trading, and major banks with euro trading desks in London may find that they need to relocate some of these functions to office markets within the EU. While this does not necessarily mean a wholesale relocation, we should expect some vacant space from banks to come to the market once this restructuring has taken place.

"However, it should be noted that many businesses with a large London presence are focused on markets outside the EU, and the UK’s exit from the Union will have a limited impact on them. The referendum, and possibility of Brexit, has been a live risk since the Conservative victory in the general election in May 2015. Since the general election, there has been above-average office take-up suggesting firms have adopted a business-as-usual approach; global operators such as Deutsche Bank, Thomson Reuters, Ashurst, Google and Facebook have made significant long-term commitments to London.

"There is likely to be some release of office space as businesses tighten their belts to weather the period during which trade treaties are being negotiated. However, currently availability levels are particularly low and the development pipeline remains fairly limited. The market has capacity to absorb a rise in supply before there is a possibility of a fall in prime headline rents. The impact on the investment market is likely to be less obvious. While the economic uncertainty during our exit negotiations will undoubtedly deter some domestic investors, the relative discount available to purchasers in foreign currencies will attract significant interest.

"In the medium-term however, Central London commercial property will continue to offer a higher yield than most other asset classes, and may even benefit from the instability in the equity markets."

David Sproul, chief executive of Deloitte UK, said: “The British public have spoken and made clear that they see the UK’s interests best-served by leaving the European Union. While the UK has opted for a future outside the EU, Britain remains a competitive, innovative and highly-skilled economy and an attractive place for business. However, as indicated by today’s market volatility we are likely to see a period of uncertainty. Businesses need to ensure they are set up to navigate the immediate risks and impacts of an exit, and have the processes and people in place to manage a period of upheaval.

“Against this backdrop of uncertainty, British businesses must continue to be proactive in finding ways to raise productivity and drive growth. The UK remains a world leader in R&D and a hub for innovation. This will help businesses capitalise on the opportunities and respond to the competitive threats created by the leave vote. They must also play an active role in setting a vision for a new, post-EU environment which is open, pro-growth and delivers prosperity and opportunity for all.”

Ian Stewart, chief economist of Deloitte UK, added: “Negotiating and implementing Britain’s withdrawal from the EU is huge task. But in tackling it our nation can draw on great strengths. The UK is in the top tier of the world’s most competitive economies. We have strong institutions and a highly skilled workforce. Our economy is a magnet for inward investment and enjoys one of the lowest unemployment rates in Europe. The UK faces a period of uncertainty and of great change. But the resilience and dynamism of our economy and institutions will be huge advantages as we start to navigate a prosperous future outside the EU.”

Donald Rowlands, Head of Real Estate for the UK and EMEA region at global law firm Herbert Smith Freehills: "The jury’s out on whether an exit will fundamentally alter the UK’s status as a global investment centre for real estate. The UK is seen by some as a gateway into the EU, and by others as an integral part of a global real estate market whether or not the UK remains part of the EU.

"We have spoken to a number of our overseas investor and domestic real estate clients over the last few months. BREXIT worries have undoubtedly impacted upon investor confidence in the UK investment market - volumes are well down and buyers and sellers were eagerly the result before re-entering the market.‎

"‎It is the uncertainty surrounding the result which has, in my view, caused the nervousness in investor sentiment. UK real estate remains an attractive investment in a volatile world where investor returns from other fixed income investments remains challenging.

"The exit vote may be seen by some overseas investors as an opportunity to enter the market at a time of uncertainty and, assuming there is a continued negative impact on sterling, to benefit.”

Philip Woolner, director, Cheffins Commercial, said: “It is difficult to forecast the effects that Brexit will have on the commercial property market. Ultimately, the UK, and London and Cambridge in particular, is such an attractive market for overseas investment that any knock-on effect is likely to be short-lived. There is a possibility of a period of stalling across investment sectors, with occupiers choosing to stay put, however, the fundamental prospects of business will still be strong. Before the Referendum there was a divergence of opinion within the industry with questions around the occupiers, take-up levels and restrictions on workers’ migration, however as Cambridge continues to be a powerhouse for innovation and excellence, it is doubtful that we will see a vast change to our market. It is impossible to predict the results of the Brexit until some months have passed, so in the meantime, it has to be back to business as usual and wait and see what happens.”

Nick Vose, associate at Iceni Projects, said: “What we need now is a sign of unity from Government. Despite the close result, political parties and the Government need to put the debate aside and get on with the job of governing.

“The next 100 days will be crucial in shaping the state of the nation and, while there will of course be talk of changes in leadership and government, this must be done quickly so that decisive action can be taken on important decisions that will have profound implications for the UK’s future. What we need is a strong, united Government that can look beyond the recent political jestering and take action.”

Hermes chief executive Saker Nusseibeh said: "With the vote decided yesterday, we now have to move away from the rhetoric that typified this campaign. Prior to the referendum, we ran several scenarios on our strategies, and we are reasonably confident that they were well positioned for a Brexit vote in the short term.

However, we are watching market moves very carefully to assess the degree of contagion, if any, to global markets. Besides a sharp sell-off in risk and in sterling, as well as a recession in the UK (which is expected) our fear is that this may trigger political uncertainty within Europe which in turn may lead to a severe global market correction.

 

"In any case, we know that we are now in an even more prolonged super low interest rate environment outside of the UK, with the US likely to delay its decision to raise interest rates even further out."

Neil Williams, Group Chief Economist, Hermes: "Eyebrows are being raised across the City of London. The UK’s vote to ‘leave’ provides a massive ‘curve ball’ for financial markets, which now need time to assess the policy path that a likely, new political line-up will eventually choose to go down. All of this will take time.

"Equities and the pound may remain vulnerable given the likely hit to UK growth, and risk now of weaker ties with our main trading partner, FDI foregone, and a diluted relationship with the US and other third parties that use the UK to access the Single Market.

 

"The UK economy will of course ‘survive’, given its entrepreneurial flair, increasing focus on non-EU trade, and likely policy accommodation by the Bank of England and UK Treasury. However, getting to the next stage looks a long, drawn-out ‘can of worms’, leaving considerable uncertainty for UK assets and markets. The extent of this damage now rests on the manner of the exit.

"The mark-down on assets would surely be greatest in the case of a ‘hard exit’ - entailing an acrimonious departure, lower trade, lower migration, and recession - than the more probable ‘softer’ version.

"But, even a ‘soft exit’ to a Norway or Switzerland-style associate membership will probably need several years just to end up close to ‘square one’. Greenland’s soft exit in 1985 had taken three years. We, larger and 43 years entwined in the European project, will need even longer."