7. THE UK LEAVES THE EU WITHOUT A DEAL, AND IT IS ACTUALLY OK FOR REAL ESTATE
It is hard to find anyone who says leaving the EU without a withdrawal agreement and moving immediately to World Trade Organisation rules when trading with the EU would be a wholly positive experience: The unprecedented economic uncertainty in this situation precludes it being all good.
“I’m a Brexiteer, and in the short term it makes life complicated,” Prestbury Chairman Nick Leslau said. “You would have issues with inflation and there would be short-term challenges.”
Greater inflation would have a big impact on retailers, already stretched, which would see costs rise, potentially causing more insolvencies.
In terms of investment, there are competing theories (for the truly negative view head to section 8). On the upside, the uncertainty created by no deal, especially the likely drop in sterling, would create huge opportunities for some types of investors.
“Some of the major private equity houses would look very hard at some of the major listed companies,” Cushman & Wakefield International partner Andrew Hawkins said. “Sterling would drop significantly and you could see some of the larger PE firms look to take private some of the major REITs, who are already trading at significant discounts to [net asset value]. Maybe not British Land or Landsec, because of their exposure to retail and the uncertainty about the value of those assets in the wake of the fourth industrial revolution, but maybe the London specialists.”
He added that private companies and wealthy individual investors from overseas would also see a no-deal as a buying opportunity, and pointed to Hong Kong as a major source of capital: Brexit doesn’t look so bad when in your own country people are rioting on the streets. There would be few distressed sales because of the lack of leverage in the market generally, but investors that foresaw a long-term decline in the UK economy would get out while the getting out was good.
To help stabilise the economy, interest rates would likely be dropped back toward zero, and a new round of quantitative easing introduced. Such low interest rate policies have been great for real estate over the past decade, M7 Chairman Richard Croft argued, and he believes they would help stabilise the market and limit any fallout again in the wake of a no-deal Brexit.
There is also the argument that any problems would be short-lived.
“Property lags other asset classes like equities, and goes into recessions later and emerges from recessions later,” APAM Executive Director Simon Cooke said. “What people forget is that we bounce back from recessions very quickly: Even after the financial crisis, we emerged from the recession after 18 months. So people predicting decades of economic downturn are wrong. After the UK left the European Exchange Rate Mechanism in the early 1990s, people predicted that we would underperform, but in the period since then the UK has been the best-performing economy in Europe.”
Even if the UK leaves the EU without a withdrawal agreement on 31 October, it will still, in the medium to long term, look to negotiate a new trading agreement with the EU: That after all was the point of Brexit. It may take many years, but a deal on trade is the ultimate goal.
But what form will this deal take, and how will it impact real estate?
For what a good deal with the EU might mean for UK real estate, go to section 5.
For what a bad deal with the EU for UK real estate might look like, go to section 6.
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