UK property post BREXIT 18th July 2016

The only thing certain about the last month or so for UK property has been the uncertainty. Angus McIntosh, economist, one of the UK's most enlightening commentators on commercial property, takes a at what it all means for the industry.

Gasp – we have passed through another threshold, into an unknown world. There are more thresholds to come. Unquantifiable risks – uncertainties - are everywhere; this was an accident waiting to happen. Is the commercial and residential property market “as safe as houses”, and where are the opportunities in The New Economic Era?

As at early July, three phases of uncertainty can be detected: from now until the UK decides what BREXIT means, perhaps by early 2017, and triggers Article 50; for two years whilst we negotiate Article 50; then beyond. Whilst initial forecasts suggest commercial capital property values may crash by over -6% this year, and -5% next, what about total returns, and a comparison with other assets?

Globalisation and its aftermath

In the mid 1990s, I shared a conference platform with George Schultz, former advisor to President Ronald Reagan. Together with Margaret Thatcher, he launched the new chapter of globalisation. George made the observation that, at no time in the history of the world had so many countries enjoyed so much economic growth - from the USA, to Europe, to Asia there was growth. It was an unparalleled success story. Or was it? How would it all end? Why were, and how, and are the property markets deeply involved?

The mantras of privatisation, deregulation and monetary policy spread across the globe. The Keynesian ideas of managing an economy, which had emerged from the chaos of the 1920s and 30s, were out of date. Surely they had created the high inflation of the 1970s - not OPEC countries trebling, then doubling oil prices inside a decade.

It worked like a dream. More deregulation was called for the longer it went on, property markets boomed in the 1980s, then crashed, then boomed again, then crashed big time in 2008, then boomed again in 2014. The fact that economies became far more volatile than in the evil days of Keynesian economics was ignored; this was a small price to pay for economic freedom. However, it’s self-obvious the more highly geared (leveraged) an economy, the more volatile the equity and property markets are likely to be. The 1987 equity meltdown, and the property crash of 1992 were symptomatic of this new reality.

Over time the disparity between the winners and loser in the economy, and in the property markets, became far more apparent - in the jungle, the biggest and fittest survive and prosper. (The recent BREXIT vote mirrored the fortunes of property asset values in recent years - rising asset values in London voted IN.)

The debt markets boomed, whilst the overall size of equity markets stalled; borrowing was easy and very acceptable. Deregulated financial markets and lending to property markets (both commercial and residential) prospered. This pattern has been replicated globally, including in China.

Meanwhile, over the channel in Europe, other risks were building into uncertainties. The labyrinthine complexity of the EU (although it only cost us 0.4% of our GDP, or 1.6% of annual public spending) has baffled and confused Europe, the euro currency has been mismanaged – Greece will never ever re-pay its debt and now Italy in on its way to the debtor's prison, and there has been paralysis knowing what to do about refugees – partly a product of globalization - Monetary Policy, greed and an uncontrolled birthrate in the Middle East.

In 2001, one of the King Sturge “Global Real Estate Scenarios” was named The Lords of Misrule. 9/11 took place a few months later, and the Syrian tragedy followed.

In 2005, one of the KS “European Real Estate Scenarios: Nirvana or Nemesis” was prophetically called Belshazzar’s Feast; “you have been weighed in the balance and found wanting”.

Then, in 2010, one of the RICS Foundation’s Built Environment Scenarios was called Bastion – a world of economic instability, striking disparities and mass refugee migration.

The nemesis of the financial deregulated debt boom came in 2008 - a global meltdown saved by the public sector. Then it started off again. From 2010, debt markets (fuelled by Quantitative Easing – a form of Monetary Policy re-heated - initially brilliantly saved the banking sector) have expanded and property asset prices have boomed again … for some!

Imagine what might have happened if QE finance had been pumped into the public sector, for better transport infrastructure, schools, social housing and scientific research? In recent months, the IMF and many others have suggested we must move away from QE as the only solution, but it's too late for BREXIT.

The growth of global debt stimulated by QE in mature economies (especially those with relatively stable political systems and a sound legal infrastructure like the US an UK) has been paralleled by the gigantic growth of Sovereign Wealth Funds, desperate to find a home for funds in an increasingly uncertain world.

The flight to buy Sovereign debt, at the expense of equities, pushing debt interest rates below zero, is similar to the trend of the last two decades when investors have “parked” funds in the UK and US property markets’, as safe havens in a politically troubled world, not necessarily expecting a financial income return.

The world is awash with BOTH too much debt and too many savings. Since the 2008 meltdown, this global imbalance has increased. Martin Wolf of the FT has frequently discussed “what we’ve …still to learn” and noted that there has been no attempt to find a solution to the debt-wealth imbalance, whilst John Kay, also of the FT, has talked about the financial system using “other people’s money” in a world of its own, not serving the needs of nations.

Are the Credit Rating Agencies, and the financiers generally, at the pinnacle of the detached established elite, also frequently mentioned in the FT and The Economist, who have totally lost touch with the Populist Vote? They have been warned, frequently.

Those on low or middle incomes have not prospered, whilst those at the top have enjoyed extra-ordinary gains in their property and other wealth. This has happened in Europe, USA, the oil-rich Middle East, India and especially China.

Don’t forget, the average full time salary in the UK is only around £25,000 pa with the high end being over £50,000 and lower end below £15,000. What is even more sobering is that average salaries are now £2,000 less in real terms than 2008.

Globally, the low and middle incomes are the unhappy “Populous Vote”. In the population booming Middle East it started with the Arab Spring in places like Tunisia, Libya and Egypt (initially triggered by rising food prices) and has - together with other contributing factors - descended into the war and anarchy in places like Syria – throughout dominated by religious extremism offering a simple solution. The global refugee crisis – the numbers are higher than ever recorded at 65m by the UN – are partly a product of this trend. The political consequences in the mature developed economies are increasingly obvious.

In Europe and the USA, the “Populous Vote” is luckily less violent, but its impact is just as dramatic.

The Populous Vote and Parallels in History

For many months the FT has warned the Ruling Elite need to be aware of the Populous Vote. Now it's too late – it’s happening everywhere. There is a major discontent, a feeling of anti: big banks, big business, big government, big organisations at large. It is now widely agreed that, to some extent, (on both the political right-wing and the left-wing) the BREXIT “peasants revolt” vote was a protest vote. As President Bill Clinton might have said “….it’s the economy stupid”. Anthony Hilton’s recent article in the Evening Standard summed it up: “At last, the City starts to realise: People don’t like us…….”

In the financially chaotic 1920 and 1930s, opinions also became divided between far right Fascism, versus left wing Socialism. Hitler, Franco and Mussolini versus Ramsay Macdonald and Stalin.

The parallels today are un-nerving; Trump versus Sanders, or Far-Right wing parties in Europe versus the “Socialist” Government in Greece. The Populous Vote is seeking a simple solution, but the consequences might ultimately be as disastrous as last time. All this, including BREXIT, has major implications for property markets.

Other Global Risks and Uncertainties

What about the other property related risks? China is slowing down, Russia (next World Cup) and Brazil (next Olympics) have been in deep recession, Climate Change is a big worrying unknown with world temperatures likely to rise by 2% and massive floods and drought and heat waves. Meanwhile, we are running out of electricity; the national grid is at breaking point. Soon the three day week may re-appear as the lights go out, or we suffer grey-outs.

There is a most unusual and un-predictable Presidential election in the USA, and a world is awash with refugees. Perhaps Cyber Wars also take off?

Will there be another Scottish referendum, with Scotland in the EU, and UK out? Will the border between Northern Ireland and Eire be shut? The outcome is problematic; will passports and visas be needed at both Derry and Gretna Green?

What about on-going Austerity and Quantitative Easing, boosting the wealth divide between the haves and have-nots? It’s difficult to see this changing soon - the UK has been slow to reduce its budget deficit (tax revenues are still higher then expenditure) and long-term national debt is rising. We continue to live beyond our means, it’s that simple. The challenge for any UK government is how to control annual spending, whilst increasing tax revenues – which has property tax implications!

Are all these risks to the property markets ven more important than BREXIT?

Property Markets in the UK


The global parallels of the political, economic and financial implications in the UK on the property market are obvious. The footprint of Deregulation and Privatisation, and more recently QE, are everywhere.

The simplistic naïve “spread-sheet quantitative” analysis (I know – they used to ask me for the answers) made by Credit Rating Agencies, prior to issuing CMBS, are well and truly behind us in the new age of economic uncertainty. No qualified property valuer would have been allowed to be so negligent as to not quantify the income (rent) expected from a debt security.

QE exacerbated the recent property boom in the London region, and recent counter-reactions to the slow down, including the closing of property funds, are the result of this boom.


Last year, the vast divergence between house prices reached a record; it was over £500,000 in London (Voted IN), and below £152,000 in North East England (Voted OUT). House price growth also diverged; over 15% in London and below 5% in Wales (Voted OUT).

Whilst house prices on average rose by £75,000 per year in London, they are unlikely to rise by £7,000 or less in other areas.

In London, it's widely reported, in some residential streets 70% of homes never have their lights on; absentee owners leave them vacant.

The privatised social housing market fails to deliver the needed social housing. The total built, even in a good year, is not much more than a total of 100,000, way off the target of 200,000 homes including social housing, or the 400,000 built in 1966 when England last won the World Cup in football. The parallels are too painful to consider!

Despite the possible GDP slowdown, in areas of the property market where there’s a supply shortage such as South East residential, investors may prosper, including institutional build/buy-to-let landlords – just like the 1930s.


The UK, with the USA, remains the largest “invested” property market in the world. With the £ sterling lower, is this now bargain time for even more overseas absentee investors?

Over 90% of the UK commercial property market’s value is in London and the South East (Voted IN). Can London survive outside the EU? Yes, but how? London is very resilient; when the Euro currency was created, and the UK, having fallen out of the Exchange Rate Mechanism (the for-runner to the Euro) opted to stay out, many German economists stated that the Euro was leaving the station without London. London as a financial centre and its property market have thrived, but the Euro economies have generally not fared well.

Some have suggested our trump card (no pun intended) is the City of London; it is impervious and will ride out the uncertainty. But hang on, Singapore is expanding very fast as THE international finance city, and Fin-Tech is eroding the role of all our financial institutions; why use a bank when you can do it on-line faster and cheaper? Will Bitcoin and Blockchain technology outwit the City?

Digital destruction and innovation is everywhere. London’s saviour is that the geeks of the global elite, who invent and manage digital technology, love living and working in London. London is becoming a major global Tech-Hub, but restricting inward migrant employment may undermine this trend – but only slightly.


If GDP slows down, fulltime equivalent employment will reduce; the demand for office space will diminish.

If GDP slows down, taxes may rise, even more austerity may be needed, and the demand for all property especially offices will slow down everywhere, especially where government employment is highest, such as in Liverpool and Newcastle.


If GDP slows down, retail demand will fall, and the withering High Streets will struggle even more in the face of the online retail phenomenon. Although High Street vacancy rose from 5% in 2008 to over 14% in 2010, it's only now down to 12%, despite many retail units being remodeled for other uses. Whither retail property investment?

Industrial and logistics

Industrial property, logistic facilities, supplying online retailers, will be the best longer-term bets. Perhaps price and economic efficient out-of-town retail parks – the multi-channel counter part to online retail - will also prosper.

A recent survey by Centre for Cities yet again measured the vast excess Tax Revenue earned by London, used to subsidise the north of England, Wales and Scotland. No one wants to kill the golden goose, but…

Imagine if QE finance had been put into the transport infrastructure and the knowledge economy of the wider Northern Power House, the Golden Triangle which stretches from Liverpool, to Leeds, to Hull, to Nottingham, which contain well over 10 of UK’s best universities, then what? The recent London and South East property boom might have been less and the industrial heartland of the UK would be in a better place, and perhaps would not be facing BREXIT?

Property forecasts for 2016, into 2017 and beyond

In a troubled uncertain economic climate, property (compare with equities and gilts) still seems well placed to ride out the turbulence over the next few years, even if total returns slow down significantly (see predictions above).

The recent run on property funds was totally illogical; why do institutions or any investors buy direct property investments, perhaps through a unit trust fund? We know property is illiquid (although in times of panic equities are totally un-marketable!). Surely, as property does not correlate with equities or gilts in their annual performance, property is a medium to long-term hedge against the volatility of these markets. Why panic and try to sell out short term? It’s bonkers.

The forecasts below were made immediately weeks after the Referendum result. In times of uncertainty, when political, social, economic and financial un-quantifiable risks remain, it may be necessary to revise these numbers later in the year, when the fog begins to lift.

The wider international uncertainties will exist into 2017, and well beyond.

As you can see, into 2017, rental growth disappears, apart from the industrial/logistics market.

Total returns will be far more stable than equities or gilts, due to the much higher income producing nature of real estate, but apart from the volatility of central London offices, most will keep pace with low inflation.

Have fun, enjoy and ride out the uncertainty.

Angus McIntosh, is an economist, chartered surveyor and consultant at Real Estate Forecasting Ltd and visiting professor Oxford Brookes University