Hard Brexit will test foreign lenders

Theresa May’s vision of Brexit will challenge the resolve of overseas lenders to UK property, but how many will be deterred?

Discussing Theresa May’s speech on her vision for the UK’s EU exit with a German real estate banker this week, the message was clear; whatever hurdles Brexit puts in the way, the UK still features as an important long-term part of our lending strategy.

Less than 24 hours earlier, the British prime minister had asserted that the UK cannot remain in the European single market, the sort of news that ought to have bankers in a spin. “The big shock was last June,” the banker insisted. “That was the paradigm shift.”

The UK is an integral part of the property lending strategies of many continental European banks and it is difficult to imagine many of them significantly retrenching from the market. For those who lend to UK property from overseas, the market ticks many boxes; it is transparent, it is governed by the rule of law, it has a deep level of investment activity and it is a ‘gateway’ market into Europe.

That said, a hard Brexit will present major challenges for foreign bankers. One British banker working in the London outpost of an overseas organisation admitted that the potentially increased cost of doing cross-currency business will make it more difficult to compete for deals.

The issue of future passporting rights – being able to do business across member states without being separately authorised in each country – remains unresolved. May’s vision involves aiming for the “greatest possible” access to the single market that can be achieved for a non-member, but no future arrangements can be taken for granted. Financial services lobby group TheCityUK said in a policy paper last week that it has dropped its goal of keeping the principle of passporting alive.

In a note published in response to May’s speech, lawyers from Paul Hastings said: “With confirmation that the UK will not seek to be a member of the single market, the key concern for business sectors such as the financial sector which rely heavily on free trade, equivalent rules, and the passporting of rights is what the ‘greatest possible access’ will look like in reality.”

The worst-case scenario is that at the end of the two years’ negotiations, no UK-EU deal is struck, meaning the UK falls back on the default position of adopting the trading status of the World Trade Organisation, with no preferential access to Europe.

Another major consideration for property bankers is how real estate investors will react to the hard Brexit announcement. There is a good chance that bankers – both foreign and UK-based – will be chasing fewer deals.

The results of an investor intentions survey by INREV, the association for non-listed property funds, provided some mixed messages this week. The results showed that the UK – jointly with France – topped investors’ target markets in 2017. The survey was conducted before May’s stance on exit negotiations was laid bare, but considering that Germany topped last year’s list of target jurisdictions, it goes to show that investors remain keen on the UK.

However, on sector/country combinations, the previous safe haven of London offices dropped from first place in last year’s survey to fourth, perhaps a damning reflection on Brexit-fuelled fears for occupational markets.

Separately, a report published today – although compiled before the speech – by Savills Investment Management on the subject of the outlook for Europe included central London offices among sectors to be wary of. “We recommend a defensive, income-focused approach towards real estate for risk adverse investors,” said Kiran Patel, Savills IM’s CIO.

Foreign lenders into the UK commercial property market know that Britain’s exit from the EU will present many challenges. That several see fit to stress their belief in the long-term strength of the sector suggests that the shutters won’t come down on foreign banks’ UK property units come 2019.