Brexit: September’s new dawn fades

The UK’s EU referendum vote appears to have dashed hopes of a surge in activity towards year-end.   Pause, pause, boom. That was the imagined sequence in UK commercial real estate financing. Pause for the referendum vote on 23 June, pause again for the summer holidays in July and August and then, on September 1st, […]

The UK’s EU referendum vote appears to have dashed hopes of a surge in activity towards year-end.  

Pause, pause, boom. That was the imagined sequence in UK commercial real estate financing. Pause for the referendum vote on 23 June, pause again for the summer holidays in July and August and then, on September 1st, boom! Like sprinters reacting to the starting pistol, a frantic dash would ensue to get deals and financings underway.

Given that this was based on the assumption of a vote to remain part of the European Union (EU), which failed to materialise, those involved in the market are now engaged in a different kind of race – trying to be the first to understand what the ‘leave’ vote really means. No one we have spoken with is claiming to have achieved this accolade just yet.

“It’s really too early to tell,” one adviser responded, when asked how he saw things shaping up. He added: “I appreciate that’s not a great headline.”

But although these are indeed still early days, and those in the real estate debt markets are far from the only ones feeling disorientated by the vote outcome, certain clues are emerging about what may happen next.

One possible indication emerged very quickly with the rapid plummet of the pound. The morning after the vote, it had tumbled to its lowest level for 31 years. Some speculate that this will lead to an even greater interest in the UK property market from overseas investors as values quickly declined around 20 percent in US dollar terms.

However, just because the appetite is there doesn’t necessarily mean that financing on favourable terms will be. Many think lenders which have had their margins squeezed in recent times in the face of fierce competition will take the opportunity to increase borrowing costs.

In any case, views appear to vary widely as to the attractiveness of assets even given the currency decline. One source said they thought investors from Asia and the Middle East might get jitters about the residential sector in London and the Southeast, leading to a price decline and banks “left holding the baby”.

On the plus side, there is a view that should the banks be left exposed to some distressed assets, there will at least be a reasonable number of willing buyers. As one source said: “We’ve had an eight-year run where the property cycle has been going pretty well, but recently a lot has been sold as the market anticipated the end of the cycle. Now people have cash that they can in theory use to buy from distressed sellers.”

Overall, there is no sense of panic. Many predict a softening of prices and loan-to-values edging down, but very few appear to be entertaining thoughts of a 2008-style calamity where liquidity dried up overnight. Some reassurance will no doubt be taken from currency and stock market stabilisation over the last couple of days – though it would be dangerous to assume further plunges will not occur at some point.

What’s unlikely to change in the near term is the low interest rate environment (expected, if anything, to nudge even lower) and investors’ desperate search for income. With this supporting dynamic, the popular view is that new transactions will still be originated where the fundamentals are sound and that re-financings will also continue to happen.

No longer is ‘pause, pause, boom’ the expected order of events but neither is ‘pause, pause, fall off a cliff’. Looking beyond the current confusion, one source concludes: “We will not quite get back to business as usual, but maybe something not far from it.” Again, not a great headline – but it will have to do for now.  

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