Brexit means Brexit, but does it mean much for property?

The new year is underway and Brexit is yet again dominating the political agenda in the UK. However, for the first time since that historic leave vote of 2016, it seems things really are going to be different in 2020.

So, what do political events in the UK over the past two months mean for the property sector? And could it be that their impact on domestic and international investment flows are relatively negligible?

One obvious consequence is that there is now certainty – the elusive quality which investors have missed.

After the election, there was a notable uptick in the London office market, with over £2 bn (€2.3 bn) of transactions, compared to £9 bn (€10.5 bn) of deals during the rest of 2019.

Prime minister Boris Johnson’s government today holds a commanding 80-seat majority in the House of Commons, after the Conservative party decisively won December’s general election.

This was on full display in early January. The government’s Withdrawal Agreement Bill sailed through its third and final reading in parliament, with no fuss.

As a result, on the same day this edition of PropertyEU was published, the UK was due to walk away from the trading bloc of which it has been a leading member for more than 40 years.

It is no doubt a historic step. But it is legitimate to ask if it is a meaningful one for commercial real estate, in the medium term.

A look back at the recent political past provides some context. The age of uncertainty which December’s general election banished, began in earnest back in 2017.

That was when former PM Theresa May miscalculated her options by calling a general election, which stripped her of her majority and with it the ability to ‘Get Brexit Done,’ by passing the Withdrawal Bill.

Dither and delay
The next two-and-a half years – until the general election of 12 December - were dominated by dither and delay about whether – or if - Brexit would take place.

Yet this same period was also something of a mini-golden age for UK real estate, ranking highly among the very best ever seen in the industry.

For the office and logistics asset classes, the years 2017-18 were a period of outstanding performance, fuelled in part by a flood of capital from Asia.

Last year was weak by comparison, with overall investment volumes plummeting by around 20% to £45-50 bn (€53-59 bn), as old Asian money was not replaced by new investors, who stayed away.

It appears Brexit uncertainty may have been a factor in 2019’s lagging performance, but it was only one of several – and not the leading one at that.

Meanwhile, the travails of the retail asset class since 2017 were the cause of factors remote from politics, such as changing consumer habits and the rise of e-commerce. Brexit uncertainty was some way down the list of blame.

Overall, the impact of Brexit uncertainty on property investing appears to have been small to none in the UK.
Since real estate has performed strongly in the absence of certainty over the past few years, what impact can its return be expected to have upon it.

Mat Oakley, head of Savills’ UK and European commercial property research team, is sceptical it will make a difference.

‘Real estate is a global asset class, so the question is whether the UK is more or less risky than another global domain and whether the return on offer is better or worse, than investing in the Middle East or in Hong Kong,’ he says.

‘If you compare prime yields to France and Germany, then the UK has got cheaper. Also, opportunistic US investors who like a bit of distress, may buy into it.

‘I think 2020 will be a good year for real estate because I think we’ll see improvements from core investors who have stayed away from the EU and Asians will come back. A bit more money from these sources would combine to deliver a decent pickup for the UK sector.’

Savills expects UK turnover to grow to around £60 bn (€70 bn) this year. The signs of growth are already there, with Deka already active and Union Investment rumoured to be poised to invest in the UK this year. A discounted UK market will be attractive to investors who may be overweight in the eurozone.

‘No deal’ back?
Butwhat about the threat of a ‘no deal’ Brexit?

A disorderly exit from the EU is a possibility because of a clause in the Withdrawal Agreement, which ends on 31 December - the so-called transition period; the time for negotiators to strike a post-Brexit trade deal between the UK and EU. If they don’t in the coming 11 months, then the UK leaves without one.

Joe Stokeld, senior advisor at Green Street Advisors, said: ‘The possibility of no deal may continue to weigh on sentiment to an extent because the timeline does look tight. But we believe the Brexit situation has improved because the parliamentary logjam has been resolved. For our clients, the bigger threat was a far-left government; that was foremost in their minds.’

‘We don’t see the cliff-edge being there as it was in 2019 because there’s been progress on the Irish border, citizen rights, and the financial settlement.

‘It may be that we get a rough agreement by new year’s eve. Or there could be mini deals for individual sectors.

‘I think it’s important to take a step back and look at the UK in an international context: it looks more stable post-general election and there are few governments in the EU with large stable majorities who are pro-growth. The fiscal and monetary policies should be aligned now, which will have an impact on growth.’

The prospect of a no-deal Brexit stands at around 20%, according to Savills. It is worth noting the Sterling-Euro rate is pretty much where it was 12 months ago, indicating that the market believes the UK is no more or less risky than it was at the dawn of 2019.

Alongside the fact real estate was performing strongly already, this may be another reason why this new age of certainty does not add up to anything very meaningful for UK real estate.

Midyear deadline
However, that certainty could come under strain now that trade talks are commencing in earnest. Even if the threat of a no-deal cliff edge has receded, the coming months could bring fresh uncertainty in the form of new deadlines which emerge during negotiations.

One such mini cliff edge is 30 June, by when an extension to the transition period must be agreed, if the parties believe it is necessary.

However, extending this period is ruled out by a ‘guillotine clause’ in the Withdrawal Agreement, in what looks like a bid by the government to inject impetus into negotiations, to honour its election vow to ‘get Brexit done.’

The impact of an acrimonious, no-deal Brexit, would hit some property asset classes hard.

First in the firing line would be retail. Regional shopping centres are vulnerable because no-deal Brexit risks dampening customer confidence in regions where operators are already feeling the pressure of tumbling returns and falling rents. A fall in sterling could be expected to have an inflationary impact, squeezing consumer spending.

Of course, there would be winners too, should uncertainty return and grip the sector. Niche segments such as healthcare could be attractive, as they are underpinned by long leases and government-backed income.

High-quality student accommodation could also benefit if uncertainty re-emerges, with high-end units popular with students seeking a return upon their significant personal investment. Developer Unite Group has already been a beneficiary of this trend.

‘I don’t think the risk of a hard Brexit ever went away,’ says Oakley. ‘You might argue it’s a bit lower now with the parliamentary majority, but it’s still an eminent possibility.

‘We just don’t think the situation has changed dramatically since the general election. There’s no precedent for a country to leave a trading bloc, so it’s also the case that a soft Brexit with a trade deal is uncharted territory, just as a hard Brexit would be.

‘Politics has remarkably little effect on commercial real estate markets generally. The uncertainty is not dramatically different either way, because we have no idea what the reality of the situation will be.’

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