Blog 1 – Brexit – The impact on property

As we come towards the end of a turbulent year in politics and we reflect on the months that have passed since the UK voted to leave the European Union, attention now turns to what sort of trade position we as a nation will face once Article 50 of the Lisbon Treaty is triggered. Uncertainty beset the property market in the run up to the referendum, and, following the shock of the Leave vote, market ‘turbulence’ and a projected sector-wide ‘slowdown’ have become industry watchwords.

In the housing market, there have been murmurings of a potential dramatic faltering in both transaction levels and price growth. This is true in some parts of the market, and in some regions, but most experts predict that, whilst there may indeed be a correction[1] and a slowdown in house price growth, the long term trend of growing house prices amidst a pan-UK housing crisis looks set to continue. Until such time as housebuilding can keep up with demographic trends, this shows no signs of abating.

Continuing with the subject of housebuilding, the share values of the main stock market listed UK housebuilders plummeted following the EU referendum result. (The share values have both fallen and risen as the weeks and months have passed but the aggregate position since June 23rd is decidedly negative.) The prospect of this downward pressure on prices brought about by uncertainty and lack of transaction activity weighed heavy on these stocks and continues to do so. However, it has been pointed out that, longer term, values and transactions will likely pick up again - albeit possibly more slowly than before[2] - and buying land for development now or over the next few turbulent months may be a more opportunity-laden and broadly cheaper prospect than it has been for some time. In other words, from the point of view of a housebuilder (and its shareholders) we may now have actually entered a time of cautious optimism[3], given the prospect of a future increase in profits if the players in this arena are brave in their land-buying and development strategies now and in the months ahead[4].

The outlook for the office market[5], like much else, is also uncertain. In the City and the wider financial services sector, there is widespread worry about the potential loss of Single Market financial ‘passporting’ rights[6] which could lead to an exodus (the size of which is, as yet, unclear but some say might be in the region of 100,000 jobs) of the European operations of financial institutions[7] from London to cities like Frankfurt, Paris, Amsterdam or Dublin. Whether this situation takes hold will, of course, come down to the deal that the UK and EU strike on their trade relationship post-Brexit. Any loss of these trading rights and their associated jobs will likely have indirect ‘spillover’ effects on the wider central London office market too, with the business and legal services ‘supply chain’ being so interconnected with financial services in this locality. Whether the tight supply pipeline will insulate capital and rental values in the City and wider central London office market (as well as the office market of other major UK cities with large financial sector presences[8]) remains to be seen but there is already talk of stalled construction activity, and a review of occupier requirements in light of the referendum result. Any contingency plans for a Leave vote for internationally-operating large banks will surely have included the possibility of moving at least some operations to cities in the remaining European Union[9].

The outlook[10] for the industrial market is, again, very much dependent on the deal negotiated between the EU and UK. Not all UK manufacturers export to the EU[11], nor indeed do much exporting at all. But for those that do, the Single Market in goods is important for sales; for many companies, critically important. Any restrictions on exporting ability to the EU are likely to have a negative impact on property investment in the industrial sector until such time as new export markets open up.

Open-ended Property Funds were some of the most notable early ‘casualties’ of the Leave vote[12]; trading was suspended at a number of funds in the days following the referendum as investors sought to withdraw their holdings for fear of impending losses. The illiquidity of property as an asset class once again exposed the flaws in the structure of these funds. Most have now resumed trading having marketed and sold some ‘big ticket’ properties[13], and having witnessed some degree of confidence and stability returning to the market.

Broadly speaking, the FTSE 100 itself has weathered the Brexit storm well. It was pointed out that this is likely to be because of the international complexion of London’s leading stock exchange and that the FTSE 250, which didn’t fare as well following the referendum result, is a better barometer for businesses with predominantly UK-based operations. However, this has also bounced back to rise higher than it was prior to the vote. On both indexes, housebuilders, contractors, REITS[14] and Prop Cos have suffered aggregate falls in share value since June 23rd.

And that last fact just about sums up the property market in the wake of Brexit. Until such time as there is a modicum of certainty in what the future holds, it stands to reason that transactions and property development will slow down. Unless, of course, the corresponding fall in prices, drop in the value of sterling, lowering of interest rates, additional quantitative easing and, potentially, an increase in government capital spending centred on a commitment to infrastructure and housebuilding all conspire to jumpstart the property and construction sectors over the coming months and years, as we exit the European Union.

Fortune may indeed favour the brave in this new political climate.

[1] http://www.egi.co.uk/news/rics-housing-market-losing-steam/

[2] http://www.homesandproperty.co.uk/property-news/postbrexit-london-house-prices-property-market-expected-to-slow-but-not-plummet-with-growth-a103281.html

[3] http://www.egi.co.uk/news/housebuilders-optimistic-despite-uncertainty/

[4] http://www.bdonline.co.uk/news/developers’-confidence-undimmed-by-brexit-vote/5083289.article

[6] https://www.lexisnexis.com/uk/lexispsl/financialservices/synopsis/102409:102411/EU-rights-and-requirements/Passporting-rights

[7] http://www.independent.co.uk/news/business/news/brexit-latest-banks-leave-uk-eu-jpmorgan-goldman-sachs-citi-group-deutsche-bank-a7193686.html

[8] http://www.egi.co.uk/news/brexit-hits-finance-sector-demand-in-edinburgh/

[9] http://www.financialreporter.co.uk/finance-news/ifs-single-market-issue-seriously-problematic-for-financial-services.html

[10] http://www.egi.co.uk/news/logistics-outlook-positive-despite-brexit-vote/

[11] https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/uktrade/mar2016#value-of-uk-trade-in-goods

[12] http://www.egi.co.uk/news/investors-withdrew-438m-from-property-funds-in-july/?keyword

[13] http://www.egi.co.uk/news/aberdeen-to-sell-oxford-street-block-to-pay-redemptions/

[14] http://www.egi.co.uk/news/reits-still-feeling-brexit-pain/?keyword