Boris Johnson’s Resignation: 6 Implications For Real Estate
After months of turmoil, Boris Johnson, the UK prime minister, resigned today, ushering in a summer of uncertainty while the ruling Conservative party chooses a new leader.
That has implications for Britain generally, but some very specific implications for commercial real estate. Here are the key factors.
Inflation And Recession
Inflation is at its highest in 40 years, and that plus the knock-on need to raise interest rates has many economists predicting a recession for the UK — economic growth is already slowing.
A summer without political leadership delays the process of tackling these problems. And as veteran investor Nick Leslau pointed out to Bisnow previously, the performance of UK real estate is very closely correlated with that of UK GDP.
“It’s yet more disruption at a time when we least need it,” FORE Partnership Managing Partner Basil Demeroutis told Bisnow. “Crises demand strong, unwavering — and principled — leadership and this kind of upheaval is evidence of just the opposite. Clearly government is bigger than one man or one member of Cabinet, and life will go on, but losing our chancellor, housing minister and countless others will slow the progress that is so critical to getting the economy back on its feet.”
The next leader picked by the Conservative party will be key in determining what kind of economic progress Britain makes. A fiscal conservative (with a small c) like Rishi Sunak is unlikely to provide tax breaks to stimulate the economy. That would bring down inflation, but also likely lead to a short, sharp recession.
A more fiscally loose PM would likely use tax cuts to stimulate the economy, avoiding or minimising any recession, but leading to more prolonged inflation.
The Pound And Investment
The value of the pound rose against the dollar in the immediate aftermath of Johnson’s resignation, as did British stock markets, implying that global markets thought his departure would be good for the British economy overall. But the fact remains that, at a conversion rate of $1.19 to £1, sterling is even weaker than in the immediate aftermath of the Brexit vote.
Normally a weak currency makes buying UK property cheaper for overseas investors — in the aftermath of Brexit, dollar-denominated investors from countries like Hong Kong and the U.S. made big investments in London real estate in particular.
But they will only make those investments if they believe in the underlying long-term health of the UK economy.
“The political climate of the last few weeks has damaged the UK’s international reputation and attractiveness to the global investment which will be essential to the revitalisation of our towns and cities,” The British Property Federation chief executive Melanie Leech said.
One feature of Johnson’s time in government was his sticking to the commitment of previous leaders to make the UK a net-zero economy, and there has been some nervousness in the sustainability world about whether a new PM would honour this pledge — more right-leaning parts of the Conservative party have not been as supportive of the government’s green agenda.
“A recovery must continue to be driven by a pivot to sustainable, low-carbon businesses that by definition are high growth and address the very real economic and existential threat of the climate emergency,” Demeroutis said. “I worry about climate being pushed to the back burner while government preoccupies itself with endless political point-scoring. This is exactly what we don’t need.”
The UK has (another) new housing secretary in the form of veteran MP Greg Clark. The UK has a shortage of genuinely affordable housing, and of course a new prime minister will have a huge impact on the policies that try to spur more housing creation. One big policy implication is over the proposal to allow housing association tenants to buy their homes at a discount to the market price. This was a hugely divisive proposal, with proponents arguing it facilitates home ownership among lower earners and opponents arguing that a similar scheme introduced in the 1980s has dramatically reduced the amount of affordable housing in the UK. Whether the policy is retained by a new leader could have a huge impact on the UK residential sector.
Levelling Up, the idea of boosting the UK regions outside of the south east and London where economic growth was lower, was perhaps the signature domestic policy of Johnson’s premiership. A whole new government department was created in order to facilitate the idea, and policies including planning reform were included in a “levelling up bill” earlier this year.
The idea was always to try and boost the UK regions without stunting the growth of London, the UK’s economic superpower. But there were accusations that London was being deliberately overlooked when it came to infrastructure spending and government investment. Real estate benefits from infrastructure spending, so the industry will watch with interest to see if levelling up is as explicit a part of the agenda of the new PM.
Maybe The PM Doesn’t Matter
One line of argument is that a lot of the forces that are governing the real estate market in the UK will carry on as they were, regardless of who is in charge of the country.
“We are seeing a softening of yields in several sectors combined with a number of counterparties seeking a reduction in purchase prices,” Clearbell Capital Senior Partner Manish Chande said. “Equally, the occupier market hasn’t seen a major change in sentiment either. The appointment of a new prime minister — whilst it may take a while — is not likely to have a significant effect on the current market.”
And in the world of real estate, maybe city leaders now matter more than the leaders of countries.
“On a positive note, in spite of this mess, I see plenty of examples of local leaders just getting on with it, finding brilliant policy solutions through successful networks of government, businesses, philanthropists, educators and others,” FORE’s Demeroutis said. “This is the rise of urbanism. In the face of dysfunctional federal political system, real growth is coming from those councils that find ways to drive innovation, solve problems and grab hold of opportunities. This growing metrofication is something that can and is powering the nation forward. Certainly something we consider when deciding where to invest.”