At the time of going to press, the UK’s referendum outcome was unknown. But has the property world been turned upside down since? Janine Lewis of InvestSure explains why she thinks it’s unlikely – whichever way the vote went.
Unless you have spent a large part of the last few months sailing the Mariana Trench or dusting off the Mars Rover, you’ll have noticed that there’s been a little referendum recently to allow the country to decide on Britain’s continued EU membership.
Across the course of the campaign, the rhetoric on both sides has spiralled dangerously close to the realms of the ridiculous. It would be nice to say we didn’t expect the debate to get this hysterical – but who would we be kidding? From our long-treasured freedom to buy bananas in bunches to grievous tidings of continental war, you could be forgiven for thinking that just about any and every aspect of our day-to-day lives hinges on this momentous decision.
From pensions, to international trade, to jobs, to workplace rights – all faced calamitous change if you listened to the politicians. And with each passing day, yet another item was added to the list, and the degree to which they will be destroyed became still more drastic.
The outcome was still unknown as this article went to press, but however the final vote went, we believe it will make little difference to the property market. I am not suggesting for a moment that this was not a big decision. It was, of course, and one that may well have important consequences in many areas. But the problem with this narrative is that it drowns out the middle possibility. That is, that for quite a few things, in quite a few areas, a Brexit wouldn’t really make much difference at all, either way.
The UK’s property market is potentially one of these areas. Given its status as an economic bellwether, and the fact that many voters attach great importance to house prices, the Treasury unsurprisingly sought to use it as ammunition in one of its many broadsides against the Leave campaign – with Chancellor George Osborne warning of the dire effects of a Brexit on the housing market.
The fact is though, that the Brexit debate has been little more than a red herring when it comes to the UK’s property market. Again, this is not to say the outcome will have no effect. While much is uncertain, it is of course possible that a post-Brexit economic shock – all things being equal, and if it is as severe as the doom-mongers fear – could deter some investment. But on the other hand, there is also a case to be made that being freed of EU bureaucracy might liberalise the market in certain beneficial ways.
As with all Brexit arguments, the analysis should not focus solely on whether a Brexit would have positive or negative consequences (in most cases there is an argument that there will be a bit of both), but mostly on whether these consequences make a meaningful difference to the big picture. In the case of the UK property market, whether the above scenarios come to pass or not will not meaningfully change the market fundamentals of supply and demand. Nor will it make a real difference to the nature of the challenges it faces, or the solutions that are needed.
Buoyed by China
For instance, the UK market is to a large and increasing extent buoyed by foreign, non-EU investment, for example from China. The various factors that are driving this – the relative stability and maturity of our market, the standard of our educational institutions, our great infrastructure, our cultural and geographical position in the world, long-term demand caused by a rising population set against an acute housing shortage – will realistically remain, even if we opt to do the opposite.
Whether we are in or out, British property will remain an attractive destination for foreign money. Even if some of the worst economic predictions of the Remain campaigners come to pass, Britain will still be one of the world’s premier property markets. It’s also worth bearing in mind that projects within the property market typically operate on 6- to 12-month cycles – and as a result, activity is just not as sensitive to the tos and fros of day-to-day speculation as other markets can be. As was reflected in comments from the boss of top London property developer, Telford Homes, there is a lot of momentum in the UK property market today, and a Brexit is unlikely to derail it.
The housing point is crucial here, both in that it is so central to the dynamics of our property market, and also in that the challenge it represents tends to eclipse other considerations in terms of importance. There is no doubt that we are looking down the barrel of a severe and punishing housing crisis. England alone needs a minimum of 260,000 new homes a year to cope with the rising demand. As things stand, the numbers just don’t add up. The current level of new supply is less than half of this, and to find the last time it reached equivalent levels you have look back decades. The root causes of this – a rising population, years of under-investment – have nothing whatsoever to do with EU membership, or lack of it. Whatever happened on June 23rd, exactly the same crisis was being faced on June 24th.
The desperately needed solution will also be the same, whichever way the decision went – as will the main reason why we struggle to create the necessary supply. The simple fact is that we need to get building. Most of the new-builds today are borne by the big developers, but they have warned that they alone are not in a position to meet the demand.
The problem at the heart of this is that we have a fundamentally dysfunctional property market that punishes our small-to-mid-sized developers. The reality is that their projects generally don’t fit the contemporary risk profile of banks, and so they find it difficult to raise funds quickly enough to seize the potential opportunities.
The opportunities certainly exist, as does the money. In our current sustained low-yield environment, there are plenty of professional and institutional investors out there, sitting on piles of cash, who would relish the chance to deploy it effectively. The problem, historically, has been connecting these two segments of the economy in an efficient, safe and convenient way. But we are in the age of disruption, disintermediation, online networks and platforms, and this should no longer be a barrier. Innovations such as syndication will also have a part to play.
While certain Remainers whispered in horror about the prospect of being cut off from European money, if we can substantially reduce the risk of property investment for certain key classes of investors, then we could unlock a large swathe of domestic demand for the asset class.
This is the crucial test for our property market. This is where our brightest minds and innovative efforts should be focused. The UK can succeed or fail just as well both within and without the EU – it doesn’t need to make a blind bit of difference. Looking at it this way, all the ‘what ifs’ and uncertainty around Brexit and the property market have been a distraction from what we know is (and will continue to be) the case.
The importance of the referendum outcome to the UK property market can be summed up in a quintessentially British phrase: “keep calm and carry on”.