London

Brexit uncertainty afflicts UK property market

Tuesday, May 10, 2016

Investor interest in London’s commercial and residential property markets is expected to regain vigour if United Kingdom voters opt to remain in the European Union, a new report from the Royal Institution of Chartered Surveyors (RICS) forecasts. In contrast, Paris, Frankfurt and Dublin are tagged to benefit if the looming June 23 referendum delivers a verdict in favour of leaving.

“There is no doubt that since the EU referendum became a certainty following the general election last May we have seen a decline in interest from overseas investors in UK commercial property,” observes Simon Rubinsohn, RICS chief economist. “At least in the short term, we know that international retailers and service providers are finding the UK market less attractive.”

Both the RICS survey of UK-based real estate practitioners and a KPMG survey of senior executives with 25 global investment companies, released in early April, conclude that Brexit uncertainty is dampening activity prior to the vote and could be even more damaging if a retreat from the EU is forthcoming. In particular, London’s strength as a financial capital could be eroded if EU-related business and market services move elsewhere.

However, the RICS report identifies several key factors that could help to retain companies and investors, including: London’s continuing status as a major international city; the calibre of its workforce; the quality of its office space; and lease terms that discourage sitting tenants from leaving.

“Occupier agreements are designed to withstand market volatility, with average contracts for office space lasting seven years. Many office occupants will be tied in for the assumed period of uncertainty should UK vote to leave, i.e. that caused by the two-year exit negotiations,” the report hypothesizes.

More than two-thirds of respondents to KPMG’s survey foresee a decline in global investment in UK real estate if it is no longer part of the EU, although, interestingly, only 36 per cent said their own companies would be less likely to invest in the more solitary country. Germany and France were seen as the leading alternative options for diverted investment.

A drop in UK property values and/or the value of the pound sterling is nevertheless expected to attract investors — indeed, offering market dynamics in sync with many pension funds’ modus operandi. “Investors may be able to take advantage of less competitive processes, playing the longer game, confident in the ability of the property industry to bounce back,” the KPMG survey analysis submits.

Colliers International’s 2016 survey of global investors’ sentiment found more interest in student housing in the UK than in any other global region, with 25 per cent of respondents considering it a preferred sector for investment. Withdrawal from the EU could potentially affect tenant demand, however. “Changing enrollment rules for higher education institutions after Brexit could deter international students — thus affecting demand for student accommodation and PRS (private rented sector) accommodation,” the RICS report warns.

Meanwhile, a vote to leave the EU could potentially help cool London’s overheated housing market, at least at the top end.

“A significant number of higher-end properties — particularly those in London and the southeast — are purchased by EU and non-EU individuals,” the RICS report observes. “Brexit could see less demand for higher-end properties as highly paid executives could follow their headquarters to mainland Europe, relieving pressure in demand for higher-end residential areas. We can therefore suggest housing prices could decrease in the immediate to short term.”

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