Brexit: how did the prospect of a UK exit from the EU affect the real estate market?
The results of the referendum on UK withdrawal from the European Union, held on June 23, 2016, could not leave indifferent players in the real estate market. The forecasts that have been made so far have been the most diverse, but the market hasn’t collapsed, and London, contrary to expectations, retained its position in the top three locations most promising for investment. Very soon (March 29 of this year), the UK will have to leave the EU. What are the economic consequences of this step investors expect?
Numerous studies by international consulting companies indicate that European investors are most concerned about the upcoming Brexit. In this case, the main doubts about them are the fate of the commercial real estate market.
In the PwC ranking of cities that are most promising for investment in 2019, London ranked 29th, leaving behind only Moscow and Istanbul. Other regional centers in the UK – Birmingham, Manchester and Edinburgh – are located on lines 24-26, respectively. Three quarters of the survey participants (leading players in the European real estate market) agreed that as a result of Brexit, some companies would leave London for cities in continental Europe, investment in UK real estate would decline, and the value of assets would decrease.
The projections of those who expect Brekzit negative economic consequences vary depending on what the scenario of the upcoming event will be. In the case of a “hard” British exit from the EU, experts predict a decline in foreign investment by 25-30%. Achieving a consensus with the European Union, according to analysts of BNP Paribas, promises a more favorable outlook – a decline in investment by 11% over the next three years.
The latest consensus forecast, published by the Investment Property Forum (IPF), showed that most investors expect a recession in the British real estate market and a decline in the profitability of existing assets in 2019. The exception, in general opinion, will be only the industrial sector.
The head of the Bank of England, Mark Carney, does not exclude that delaying the decision on Brekzitu could adversely affect the country’s economy. The Bank of England’s position is pessimistic: it predicts the worst year since the recession in 2009, warning that in the event of a “tough” Brexit, the cost of capital invested in commercial real estate within five years could fall by 48%. In the case of the Brekzit contract scenario, this figure will reach 27%. Capital Economics, however, notes that the analysis of the Central Bank was “based on the assumptions of the worst scenario intended for the stress test of the banking system,” and cannot be taken into account when it comes to “plausible forecasts”.
Risks versus opportunities
Waiting for Brexit, investors choose different behavioral strategies. Someone prefers to wait or invest in the real estate of other countries, and someone continues to benefit from one of the world’s leading real estate markets.
Investors from the Asia-Pacific region and the USA are particularly active in the UK market. In 2017, Asian investors reached record levels of about $ 20 billion. The main advantage for them was the price difference due to the depreciation of the British pound (since the referendum for Brexit, it depreciated by about 15% against the US dollar).
Noteworthy are the results of a survey conducted by KPMG among the participants of the REInvest Summit at MIPIM in 2017. 46% of respondents (real estate investors from 23 countries with a total portfolio of investments in excess of $ 600 billion) said they would continue to invest in real estate in the UK even after the country’s withdrawal from the EU. 44% of respondents said they intend to slow down or reduce investments somewhat, and only 10% decided to suspend investments in general.
The situation with Brekzit undoubtedly introduces uncertainty on the market, however, the attitude of investors towards it varies considerably depending on the country of origin of their capital and investment strategies.
According to George Kachmazov, Tranio managing partner: “Time will tell how Brexit will affect the UK. We believe that the British economy is reliable enough. Our investors in this country are interested in building low-cost housing and micro-apartments, as well as projects with a high margin of safety in terms of their sensitivity to potential price correction. ” Alistair Medous, head of capital markets in the UK at JLL, adheres to the same opinion: “Brexit’s perspective does not stop international investors who are considering their investments in the longer term.”
According to JLL, capital flow to London property in 2019 will increase. The ability to play on the difference in exchange rates and reduce the activity of a number of competitors can open up new ones.