Brexit still has the capacity to shock

The triggering of Article 50 passed with little reaction from the real estate finance industry, but it brings into sharp focus the political and economic challenges facing the UK and Europe.

Within the European real estate world, and the financing market that supports it, the triggering of Article 50 of the Lisbon Treaty by the UK yesterday passed with little fanfare.

Property professionals have had nine months to get used to the fact the UK will be leaving the European Union and the market has known since last October that the formal process would be set in train by the end of March. There have even been two months to absorb the news that the UK will not seek membership of the single market. In many ways, yesterday’s events seemed to be a formality, albeit a pretty historic one, that has already been priced into the market.

But the triggering of Article 50 should serve as a reminder that Brexit, now two years away, will be a seismic event that could have major consequences for the European property markets.

Some in the real estate industry have attempted to play down the impact of the unfolding Brexit process. There has been much talk of the strength of the UK economy and global investors’ confidence in the property market.

It is true that some economists’ dramatic predictions for the aftermath of a ‘leave’ vote seem overblown in retrospect. It is also true that investor and lender activity rebounded in the final quarter of 2016, after six subdued months.

But the impact of the referendum result on the market has undoubtedly been significant. Cushman & Wakefield’s ‘Brexit Tracker’ research, published in February, shows that a quarter of UK investment deals failed to progress last year, compared with 10 percent in normal market conditions. Across the UK, full-year 2016 investment activity was 41 percent lower than 2015.

The reality is that Brexit has not happened yet. The triggering of Article 50 ends a state of limbo and begins the formal negotiations that will determine the UK’s relationship with the rest of Europe. There remains a very real possibility that the two-year countdown will end with a stalemate over a trade deal. The rejection by Germany’s Angela Merkel of Theresa May’s demand that negotiations for the future relationship should run alongside divorce proceedings makes it clear that there are battles ahead.

Intense scrutiny by the media of the progress – or lack of it – towards a working UK/EU trade deal begins now and as events unfold, real estate investors, bankers and alternative lenders will be forced to reassess the risk/reward profile of the UK market. How easy will it be to do cross-border business into the UK if a trade deal is not reached by March 2019? How will lenders’ business be affected if financial passporting rights are lost? Many questions remain unanswered.

Like many other industries, European real estate finance needs the UK government and the EU to come to an agreement that ensures the country is open to an international workforce and that business can be done as smoothly as possible across borders.

At MIPIM in Cannes earlier this month, a common refrain was that although we are late in the cycle, strong investor demand and sound underlying property fundamentals should keep the market buoyant for the foreseeable future, barring another political or economic shock. Brexit has the capacity to shock.