One subject is dominating discourse in the UK CRE market: potential Brexit.
One way or another, history will be made five weeks from today when the British people vote on whether the UK should remain a member of the European Union. The real estate industry is stocked with opinionated people who no doubt have a range of views on the topic, but the clearest message is this: the referendum is disruptive and a ‘leave’ vote would have little upside.
“We believe a vote to leave the EU would lead to business uncertainty while negotiations take place on an exit treaty,” wrote Robert Noel, chairman of one of the UK’s largest REITs, Land Securities, in its results this week. “An exit could be painful for the property industry and those it supports.”
Lower occupational demand, falling rental values and a reduction in construction commitments could be the result, Noel warned, before adding the caveat that, of course, the decision is up to the British people rather than businesses.
The referendum was the hot topic at two industry gatherings last week. At one, a panel including a lawyer, investor, agent and equity analyst seemed to put themselves firmly in the ‘Bremainer’ camp. At the other, finance specialists chose their words carefully, but Brexit was discussed as one might ponder a looming storm.
“The majority of our clients think that a Brexit vote would be detrimental,” stated Mark Payne, a real estate partner with law firm Clifford Chance, speaking at AEW Europe’s debate on the referendum. “Since January, we’ve seen the flow of transactions dry up; the uncertainty of a possible Brexit hangs over investors.”
The value of sterling would fall, London stocks would be hit and years of uncertainty would ensue as the UK renegotiated its place in the world, came the anti-Brexit arguments.
David Ainsworth, CEO of investor City Offices Real Estate, called London the “greatest city in the world” but warned against a complacent attitude to its status: “I’ve seen London pull itself up from a really bad place in the late 1970s/early 1980s. It is more vulnerable than we might think to movements in capital and occupational changes.”
It is not a given that the likes of tech giants would choose to stay, Ainsworth said. “It seems odd to be creating a self-inflicted wound,” he added.
A day earlier, at the Loan Market Association’s (LMA) annual real estate conference, lenders were less forthright. The message some panellists aimed to hammer home was that, yes, the referendum is affecting deal flow and the ability to provide finance, but the market will withstand any eventuality.
Barclays’ head of London Real Estate, Sharon Quinlan, expressed this sentiment: “My personal view is that if there is a ‘remain’ vote, there will be a bumper second half of the year. If the UK votes to leave, there will be a further period of standstill while the market normalises. But it will normalise and people will become active again.”
Some panellists suggested that Brexit should be seen within the context of wider market jitters caused by global economic uncertainty. “Brexit has given people an opportunity to pause, but there are a number of trends working through the system,” said Jamil Farooqi, co-head of junior real estate finance at M&G, noting that investor demand was already cooling towards the end of 2015.
One banker panellist, who asked not to be named, dispensed with sangfroid and argued that two very different markets could result from the referendum. A ‘remain’ vote would lead to an outpouring of pent-up demand and supply, while a ‘leave’ vote could lead to market “lockdown” and a protracted period of illiquidity until the market could price the risk associated with the UK being outside the EU.
The majority of those real estate professionals willing to speak in public about the referendum tend to have little positive to say about it. Speaking to finance specialists in private, it’s easy to get the sense that they cannot wait for it to be June 24, and for the UK to be staying in Europe.