• Real Estate - What does Brexit mean for our clients?

Real Estate - What does Brexit mean for our clients?

01 September 2016

After months of fiery debate, public letters, and damning statistics, the argument over Britain’s potential exit from the European Union – commonly known as Brexit – yesterday came to a head. The united Kingdom has voted to leave the European Union, and Prime Minister David Cameron has resigned. We’re looking at the how the lead up to the EU Referendum impacted the global real estate market, and ask, what will be the consequences of the leave vote now?

Variation across the global real estate market

In the lead up to the UK’s EU Referendum, we witnessed hesitancy in the global real estate markets, as was the case in the lead up to the 2014 Scottish Referendum. Whilst nervousness has been felt most acutely in London and the UK, the ripples caused by the Brexit row have been felt across the globe. The marginal leave vote will have far-reaching consequences, and uncertainty around the result in the lead up has left investors wary of long-term investment, as markets fluctuated hugely yesterday and this morning.

Looking locally at the UK real estate market, regions outside of London have performed positively. Manchester led a group of cities firmly rooted in the “stay” camp, though the vote across some northern territories was much closer than people expected: Leeds, Sheffield, Cardiff, Glasgow, Nottingham, Birmingham, Liverpool, Bristol and Newcastle. These so-called “second cities” have enjoyed a surge in their local property markets as a result of high and escalating prices in London. 

Commercial property companies in the run up to the vote

In general, the real estate industry has been waiting until the UK decides before deciding on action. Overnight we saw shares in public real estate firms plummet.  Property transactions across the globe have slowed over the last few months, whilst some investors have added “Brexit clauses” to their contracts (particularly buy-to-let landlords and those buying off-plan) so, that in the event of a vote to leave, they have the option to exit the deal. It will be fascinating to see which of our clients now decide to invoke those clauses, and how their planned investments will be affected.

In London, several new residential developments have taken Brexit deposits, which off-plan buyers may now seek to get back following the Leave vote. IPOs on the London Stock Exchange for UK-based companies have also noticeably slowed down.  In addition, some Asian investors have withdrawn their money from the markets, as their currencies have declined and calls to invest domestically increased. 


The negative outcomes of a vote to leave

Now that the UK has voted to leave the EU, there will be a two-year negotiation period between the UK and the EU member states, meaning any major changes will be delayed. It will be a period of uncertainty – not just for the UK, but for the EU as a whole.

In the UK, property values are likely to decline by about 10 percent, with London bearing the brunt of the hit. Valuers will be expecting a tough time for the second quarter, since quarterly valuations for a whole host of funds will be prepared in the coming weeks. It appears that some banks are planning move their head offices from the UK to Paris in the event of a Brexit, while others simply say that they will scale back their UK activities. 

The European Union and United States will have to renegotiate their trade agreements and treaties with the UK, which is likely to take a number of years, leaving yet more uncertainty in its wake.
Now that Brexit has become a reality, worldwide interest rates will likely remain low for longer. The FTSE has plummeted as has the value of the British pound. In Canada – a country which has a long tradition of doing business with Britain – and Australia, the likely consequence would be that their respective dollars would continue to falter, fueling the continued rise in Canadian and Australian real estate prices and foreign investment. 

The positive outcomes of a vote to leave

If values are to drop by the projected amount, it may present certain opportunities for some Brits. First, homes would be more affordable, allowing some buyers who had hesitated as a result of the three percent Stamp duty increase on purchases of additional buy-to-let residential property to get back in the game. A decline in values would also benefit London first-time buyers who up until today have been unable to get on the property ladder in what is an unaffordable city for the majority of the younger generation. 
In the US, the destabilisation of the real estate market following a Brexit may trigger investors to seek the safety of US Treasuries, driving down bond yields and interest rates. This may also attract more foreign investment into the relative safety of US CRE.

Also, following the 2008 crash, many Funds have built up a significant amount of cash in the event of an investment pullout. So if there’s an exodus from funds by individuals in response to a “leave” vote, the funds will have the cash needed to pay down the withdrawals. 

Overall, it is clear that this vote to leave the European Union will have long-lasting outcomes across global real estate markets, the long-term impacts of which we cannot predict. The world’s property market was certainly, largely, hoping for a vote to remain in the EU. The lead up to this monumental Referendum has taken its toll on the global property market and predicting how long it will take to recover from the Leave vote remains the million dollar question.