A Disastrous Outcome Or Nothing To Fear — What A 'No-Deal' Brexit Would Mean For U.K. Property
Talks between Britain and the EU have stalled, raising the spectre of a “no-deal” Brexit.
No agreement by the March 2019 deadline would see the U.K. immediately exit the Single Market and Customs Union and adopt World Trade Organisation rules on trade. This would have a major impact on many areas of life in Britain.
What would it mean for commercial property?
“A pretty disastrous outcome” — UBS Asset Management European real estate analyst Zachary Gauge
“In short, it's likely to be a pretty disastrous outcome, and we would expect some of the key drivers which have supported the resilient performance of the U.K. real estate market in the post-referendum period to start to unwind.
“Probably the most significant impact would be a turnaround in the occupational market. The uncertainty caused by the referendum has caused a dip in active demand levels, however there have been very few incidents of occupiers actually cutting back on their existing occupied space as there have been few examples of significant Brexit-related job losses — so far.
“The majority of economic forecasters are predicting that under a no-deal scenario the U.K. would enter a recession and there would be significant impacts for the labour markets with knock-on effects for real estate occupation — vacancy levels are likely to sharply increase, placing downward pressure on rents.
“When this reaches a certain level, sell-side pressures will emerge if landlords are unable to maintain their cash flows, which will trigger a correction in asset pricing. And this could already be underway as we may see a reversal in the ultra-low interest rate environment which has ultimately protected property pricing even as the outlook has turned increasingly uncertain.”
“Hard to see such an outcome as anything but negative” — Barings Real Estate Director for European research and strategy Paul Stewart
“While it is currently impossible to ascribe a probability to the ‘no deal’ scenario, it would be hard to see such an outcome as anything but negative. For U.K. retail, tariffs and other trade frictions might mean that shortages of certain products could quickly emerge. That implies price rises and reduced purchasing power for consumers.
“In the industrials space, the recent pace of growth shows the internet is clearly a structural driver, but sluggish consumption would likely have immediate negative knock-on effects for logistics.
“In the office sector, the City would likely feel the brunt with immediate passporting rights lost, but perhaps largely West End-based hedge funds and private equity might benefit if the U.K. government were to respond by slashing financial regulation.
“Although this presents a somewhat worrying prognosis for rents, the U.K. commercial property market is largely deleveraged, and combined with likely emergency accommodative monetary policy, risks to prime property values may be lower than this gloomy occupier market outlook implies.”
“There is nothing to be afraid of” — Quidnet Capital partner Richard Tice
“Most countries around the world operate under WTO rules, as we do with our biggest single trading partner, the U.S. There is nothing to be afraid of; it is the global base-case standard.
“Every country in the world excluding North Korea has access to the Single Market, the only question is what tariffs may or may not be paid on goods, remembering that there are no tariffs on services.
“It is likely to be very good news for U.K. manufacturers, who will see domestically sourced orders increase, as [has] already begun in car components and housebuilding. Thus industrial tenant demand will remain strong and grow.
“The sterling currency may fall a bit further, which would encourage more global investors here.
“The bigger issue for the industry is the risk of a Corbyn government.”
“Port operators will see this as a strong business opportunity” — Michael Hughes, chief executive of logistics specialist Verdion
“The U.K. will see much stronger demand for warehousing around port areas in the event of a no-deal Brexit. Processing goods and clearing them through customs at port locations will mean more storage is needed, especially in the short term as new systems are rolled in and the industry adapts.
“The big port operators in particular are likely to see the no deal route as a strong business opportunity, including expansion of their logistics property as well as their ports operations generally.”
“A cliff edge exit would significantly increase the likelihood of the U.K. electing in a hard-left-led U.K. government” - Tristan Capital head of research Simon Martin
"Most people we talk to expect a negotiated settlement and, in all honesty I think it impossible to know what the consequences of a ‘no-deal’ Brexit would be.
"There are some estimates being put together and these are helping people start to think about how to price the risk, but in our view the real risk of crashing out of Europe would be the U.K. political consequences. I suspect a cliff edge exit would significantly increase the likelihood of the U.K. electing in a hard-left-led UK government. That would bring a very different tax, regulatory and economic approach to running the country."
“London has a deep and diverse investor base” — CBRE Global Investors Senior Director of EMEA strategy and research Andrew Angeli
“London has always been good at reinventing itself, and a hard Brexit may force its hand to do so post-haste.
“From an operational point of view, existing under WTO rules would have a greater impact on other areas of the economy than real estate fund management. However, we would not be immune for the occupational repercussions and a rattling of investor sentiment.
“However, the fact remains that the U.K. has a very deep and diverse domestic investor base that will always be compelled to invest here.
“A further weakening in Sterling, which should be anticipated under a no-deal scenario, would surely energise certain investors as well.”
"Retail's reality is stable but unexciting" - Ellandi co founder Mark Robinson
"The uncertainty surrounding the Brexit referendum outcome has certainly adversely effected shopping centre investment volumes with turnover this year bumping along at a post-crash low. However, despite some of the temporal negative effects on retailers, caused by imported cost price inflation, or indeed what you might read in the papers, the reality of the occupational market has to date been rather stable, if unexciting.
"The prospect of a no-deal Brexit does seem to be increasing, but there again so too does the once impossible-seeming no-Brexit outcome; but maybe this is just the wishful thinking of an avid Remainer?
"However, advocates of 'no-deal' seem to be in deliberate denial that even this requires co-operation and agreement; the alternative to this is actually a 'chaotic no deal' the consequences of which are genuinely hard to comprehend.
"Either way, there are few serious politicians, economists, businessmen or indeed property investors who believe that no-deal is better than a bad deal; I am firmly with this consensus and would urge the government to put patriotism before party politics and do the best deal for the nation."