What Brexit Could Do For Real Estate, From 4 Investors Who Want It
The vast majority of commentary in the real estate and business press focuses on the potential negative consequences of Brexit — after all, business hates uncertainty, and even the most staunch pro-Brexit supporter admits the process is hugely disruptive.
But here is the counterpoint, from some of the senior real estate professionals who wanted Brexit and still believe it will be hugely beneficial for the U.K. and its real estate market.
Considering the dire predictions about the U.K. economy, and the sharp sell-off of units in property funds in the immediate aftermath of last year’s vote, the effects thus far have been fairly benign.
True, the U.K. economy did not perform as expected in the second quarter, banks are starting to move jobs out of the City of London and values of secondary property assets have started to fall.
But Central London leasing figures were robust in the first half of the year, banks are still taking big chunks of space, manufacturers like BMW are committing to continue car assembly in Britain, and the U.K. retained its spot at the top of the European investment tree in the second quarter.
Is Brexit A Red Herring?
“It is difficult to dislocate the Brexit impact from what was the end of an amazing bull run, especially in the South East,” Prestbury Investments Chairman Nick Leslau said. “Quantitative easing and money printing continue to keep rates abnormally low and this is ensuring a very modest impact upon property values whatever the cause.”
For some types of property, particularly trophy London assets, Brexit has been positive, because the drop in the value of Sterling has made them more appealing to Asian investors.
“Prime assets, like London trophy buildings or logistics, continue to see huge amounts of capital chasing them, and I would expect that to continue,” said Simon Cooke, founder and executive director of £1.3B asset manager APAM. But he does foresee an effect on secondary and retail assets, although again he stresses that it is difficult to disentangle the effect of Brexit from the cooling of an overheated market.
“If you bought secondary or regional assets or some retail in 2014 or 2015 then you will have lost money,” Cooke said. “If they were yielding 7-8% before, then they’re at 8-9% now, so that's a 20% reduction in value.
“But there are a lot of people using Brexit as a red herring, retailers and estate agents who are blaming Brexit when things were going wrong already. London house prices had risen 87% in 10 years and that just couldn’t continue. And some retailers are blaming Brexit for their problems, when B&M and Zara have just produced record results. So why isn’t Brexit affecting them?”
Moving From Paralysis To Deregulation
Quidnet CEO Richard Tice is U.K. real estate’s Brexiteer-in-chief. He co-founded one of the two main pro-leave parties, leave.eu, alongside Arron Banks, the financier who was one of the principal backers of the U.K. Independence Party. He is now co-chair of the Leave Means Leave campaign, which aims to ensure as full a departure from the E.U. as possible.
He said the effect on real estate so far has been minimal.
“You had a self-inflicted crisis in open-ended funds, but that actually demonstrated the liquidity of the market, because it resolved itself within three months. The London leasing market is doing well and we are not seeing any sign of renewals slow[ing] down in our regional portfolio.”
In terms of what Brexit could do for real estate, experts believe the benefits lie in the deregulation that could occur if the U.K. is liberated from a rigid European Union.
“When I was 16, I campaigned for the U.K. to enter the E.U. — I was young and enthusiastic,” former Europa Capital partner Noel Manns said. “But now it’s in a state of paralysis. I am very excited about Brexit — it's the second deregulation event of my lifetime after the Big Bang. Philip Hammond has talked about not wanting to undercut the E.U. on taxes, but we have to be prepared to do that.”
Tice was even more explicit on the prospect of the U.K. becoming a low tax hub for international capital.
“We should be the Singapore of [the] West on steroids,” he said. “That would help the economy, and the rising tide raises all boats. We have the most transparent freehold system and legal system in the world and it would hugely increase foreign direct investment, in real estate and all sectors.”
On the potential downside for London and financial services from an exit from the E.U. single market, Manns said, “I’m sanguine about the effects on the City of London. The E.U. needs the City to finance its institutions, and the City has always been excellent at changing its skill set to meet the needs of financial markets. Also, big tech companies are still picking London for their headquarters. We need to ensure those companies with four or five people can still afford to set up in London.”
Rebalancing The Economy
For Cooke, Brexit is about making sure London no longer has such a stranglehold on the U.K. economy and infrastructure.
“In the past 10 years, London house prices have risen 87%, and in Newcastle they have fallen 7%. That kind of disparity is unsustainable as a country," he said. "Brexit is a huge chance to rebalance the economy and the country away from London. If thousands of bankers leave London is that a bad thing for the country?”
Places like Manchester, Liverpool and Leeds have potential, and Cooke would like to see more infrastructure spending funneled there.
He admits Brexit will have a short-term cost, but believes it will be beneficial in the long term.
“If we can no longer import goods from places like Germany then we might have to rebalance the economy towards engineering and manufacturing. That will have a huge impact and need a lot of spending in the immediate term, but that investment will be great for the country in the long term.”
Leslau is also confident for the long term after an initial period of instability. Still, politics loom large in any analysis of how Brexit will play out.
The Right Government For The Job?
“What matters going forwards is GDP growth because that will have the greatest bearing upon property values as it always has done. Ultimately, after an inevitable bumpy ride, I remain confident that the U.K. will become a greater economic powerhouse than it has been for the last 40 years provided we can avoid the cataclysmic disaster of a financially illiterate and ruthless Marxist government, which will take us back economically 40 years.
“I am much more concerned today about the global social ramifications of a so-called populist movement lurching in all sorts of directions, the results [of] which are beginning to destabilize society in a manner most of us have never seen in our lifetimes.”
Tice is also wary of the political situation, which he said will hamper the potential positive effects of Brexit in the short and possibly medium term.
“The next few months are very important,” he said. “I think if we end up with a long transition period then the economy and real estate will just plod along, as if our feet were stuck in glue. That is the kind of uncertainty markets don’t like.
“I think it’s slightly less than 50/50 as to whether the government has the backbone to push on and secure the kind of deal we need. There’s a 5% chance that we have three consecutive quarters of a shrinking economy, people get nervous and then people start talking about a second referendum.”
But on the whole there is optimism, summed up by Leslau.
“I believe that within five to 10 years Brexit will appear as just a blip on the graph of economic history yet the hysteria surrounding this subject would make us think we are entering financial Armageddon,” he said. “The world will keep turning and we will keep trading, only much more successfully and we will have regained some genuine pride in our nation and its achievements.”