It doesn’t matter how unlikely a UK exit from the EU might be – even the hint of a possibility and the resulting uncertainty can affect investment. John Condliffe, real estate partner at Hogan Lovells, lifts the lid on just how damaging whispers could be for inward investment
The UK will vote on whether to remain in the European Union on 23 June.
There are already murmurs among the business community about the threats (or, for some, the benefits) of leaving the EU. The real estate industry is no different.
Investment decisions are driven by perception as well as by reality. With a referendum on EU membership in the pipeline, the economic realities of leaving the EU are perhaps less important than property investors’ perceptions. Recent polls have indicated that a large majority of real estate investors oppose “Brexit”. Investors’ concern, coupled with the uncertainty posed by the impending referendum, is bound to unsettle real estate investment to some degree.
The effects of this perception pose challenges. The uncertainty generated by a referendum (as well as post-referendum, in the event that the UK voted to leave) may lead to a reduction in leasing activity and even shorter lease lengths. Institutional landlords prefer long leases because they ensure longer-term income.
In times of uncertainty, though, occupational tenants would have the bargaining power to negotiate short-term tenancies. Tenancy decisions may even be deferred until the political landscape settles. Given that the majority of UK space is owned by institutions such as pension funds, the pressure of Brexit would have effects up and down the economic ladder.
Brexit could even have a discrete effect on specific real estate sectors. We have witnessed a surge in student accommodation development over the past few years and such development is bound to expand further with the removal of caps on student numbers. Currently, about 18% of the UK’s student population is international. An exit from the EU would threaten the UK’s global reputation as a country welcoming to foreign students, and would directly affect the number of EU students who study here through European exchange programmes. Such reductions would not be good news for the development of student living space.
But despite the drawbacks, Brexit does not mean the UK real estate market would crumble. With or without the EU, people living in the UK will want to spend their incomes in the country’s hotels, shopping centres, estate agencies and restaurants. Demand for such spaces is therefore unlikely to be affected indefinitely. Brexit would not cause institutional real estate investors to give up hope altogether.
It is impossible to predict how long the effects of Brexit would affect the real estate market. With or without EU membership, the UK offers interesting real estate and development opportunities for investors.
But, either way, is it worth taking the risk to find out?
Hogan Lovells’ Brexit map, giving an insight into other legal implications of Brexit, can be found at http://maps.hoganlovells.com/europe