The unexpected outcome of the UK elections on Thursday also appears to have caught many in the real estate community by surprise.
Although the result of Thursday's election will not reverse the UK decision on Brexit and prime minister Theresa May is not throwing in the towel despite the Conservatives losing their majority, it is clear that the uncertainty overshadowing UK business now that the country has a hung parliament will also have repercussions for the property sector.
Already industry experts see volatility and uncertainty returning to the UK property sector. A number of proposed new projects may be put on hold as the property sector takes stock of the result, Hayley Scott of Investec Structured Property Finance said.
'Banks are likely to be cautious about financing new developments. Real estate as an asset class will lose favour with institutional and overseas investors as doubts hang over the UK real estate sector. The UK election result will have a major impact on the real estate market as well as the wider economic landscape.'
Europe will benefit
More institutional investors will likely allocate capital for real estate to continental Europe rather than the UK following the unexpected outcome of the country’s elections on Thursday, Jos Short, chairman of London-based Internos Global Investors, told PropertyEU.
‘Pension funds and insurance companies are naturally cautious investors,’ he pointed out. ‘I think they will struggle to deploy more capital in the UK.’
Some European countries will benefit more than others, he added. ‘The deeper, more liquid markets like Germany and France will definitely benefit. The Netherlands is another market that stands to gain from this.’
Short expressed anger at the outcome of the UK elections, saying May had only herself to blame for running a very poor election campaign. ‘The Conservatives had a massive majority in the polls when the election campaign was started. That has now completely dissipated.’
On the positive side, the hung parliament could lead to negotiations for a softer Brexit, the company’s CEO Andrew Thornton noted. ‘We may now see a more sensible debate on Brexit that allows the European Union to come out stronger. And a stronger Europe is never bad for the broader economy.’
The relative value of continental Europe vis-à-vis the US will increase while it will decline for the UK, Thornton agreed. ‘This is bad for the UK but positive for Europe.’
Many industry experts expressed fears that sterling will tumble on the prospect of Brexit talks falling into turmoil, putting further pressure on currency-linked inflation as import prices continue to rise. ‘The Brexit road was always going to be long, but a hung parliament puts in place an additional speed bump,’ said Hermes' group chief economist Neil Williams.
Pressure on affordable housing
Amid widespread hopes for a softer Brexit, the uncertainty surrounding the Brexit negotiations is already having repercussions. Several industry experts are signalling an exodus of international businesses and European workers from the UK and the trend is not limited to the banking sector, Thornton said. Citing discussions with colleagues at the company’s offices on the Continent, he said there was growing evidence of people leaving the UK and settling in cities like Frankfurt and Paris.
‘In Frankfurt they are seeing a significant boost in rents and prices for residential properties and they are blaming the Brits. This is a regular theme.’
In the longer term, higher residential prices will put pressure on the market and reduce affordability, Short pointed out. ‘This will create disturbances in some of Europe’s key cities,’ he predicted.
On a small level Internos itself is also taking part in the trend of relocating activities from the UK. The company runs its latest AIFM-regulated hotel fund out of Paris, Short said. ‘We wanted the fund to be future-proof and able to retain its passporting rights in Europe. In the past we would have done the fund administration from London. These may seem like small things, but when you add them all up, it’s quite significant.’
In France, recent presidential elections also produced an unexpected outcome in the guise of Emmanuel Macron, whose new centrist party is believed to be within reach of a clear majority in parliamentary elections.
As The Economist noted in its latest edition, Macron has already torn up the unwritten rules governing the French presidential elections. ‘Now he looks set to rip apart those behind the party-political system too.’
Unfortunately for Theresa May, there’s no rule book at all for the uncharted territory she is about to explore.
Judi Seebus
Editor in chief