COMMENT Brexit has been a profound source of unease for decision-makers in the real estate industry ever since the 2015 Conservative election manifesto promised an in-out referendum on EU membership.
Anxiety is an occupational hazard in our industry, so if we weren’t worrying about Brexit, we would probably be worrying about something else. Now, of course, we do have something else to worry about: the economic impact of coronavirus is likely to dwarf even the hardest of hard Brexits. But even so, Brexit anxiety has indisputably taken its toll on real estate over the past five years.
Take, for example, investment in UK real estate. CBRE research shows that the amount of investment in UK commercial real estate, by both domestic and overseas investors, usually closely tracks the amount of investment in global real estate overall. This is because the UK is a particularly open, internationalised economy with few barriers to capital flows, so its performance tends to mirror global activity.
However, after the EU referendum was called in early 2016, this relationship broke down. Annual UK real estate transactions in 2016 slumped by 25% compared with 2015. The market then recovered, but the relationship with global investment remained broken, and volumes experienced a fresh 21% slump in 2019 as the Brexit saga reached a new low point.
By the time we entered lockdown in March, this underperformance in the real estate investment market amounted to a staggering £117bn investment loss since the referendum. That is two full years’ worth of activity.
An end to uncertainty
There appears to be no other plausible explanation for this underperformance than fears about Brexit. Other major global economic factors which would have depressed UK investment volumes (such as the US-China trade dispute) are excluded from our calculation, by definition.
The good news is that Brexit uncertainty is coming to an end – and however it ends, the market is much more prepared than it was even a year ago. We think that, despite the current political noise, the uncertainty is now down to manageable levels. The choices are clear and the endpoints defined. We are no longer in the realm of “unknown unknowns”, which caused such turbulence in the second half of 2016.
There are, of course, some sector-specific details to be ironed out, most notably the precise coverage of the anticipated agreement on financial services, which concern some London occupiers and landlords in particular. But even here, levels of concern are significantly lower than a year ago.
Optimists will say that recent underperformance in real estate markets is entirely due to this uncertainty, and that once that uncertainty is removed, or at least understood, the market will spring back.
Pessimists will say that markets are already discounting short-term uncertainty and instead making a judgement about how Brexit will affect the UK in the long term – and they don’t like it. On this analysis, the underperformance we’ve seen in UK real estate will persist.
This analysis is too gloomy. This is partly because there is plenty of opportunity in faster-growing sectors of UK real estate such as “big box” logistics and rented residential blocks. But it is also too gloomy because it assumes a static view of the UK economic environment.
Even a “remainer” can accept that Brexit presents at least some opportunities – for example, to change domestic policy relating to trade, VAT or regulation. There will be specific items on the real estate industry’s agenda in this respect, such as removing VAT on brownfield housing or reforms to environmental impact assessments for proposed development.
Other worries
Even if there were no such opportunities and being outside the EU was in and of itself a “net negative” for UK real estate, this doesn’t mean that governments and businesses have no flexibility to recover ground. They do.
If there is any major Brexit-related uncertainty still in the system as we turn the corner into 2021, it is over the capacity and willingness of the economy to respond to potential weakness. Given everything else that is going on, that capacity and willingness seems so high that it will be almost impossible to discern any Brexit-related weakness in 2021 anyway.
What’s more, the real estate industry has got plenty of other things to worry about – for example, the big structural shift to online retail, the future of the office, unprecedented government intervention in rent collection and evictions, and (in England) big government reviews of land use planning and business rates.
So even as the most perilous moment of the EU-UK negotiation approaches, Brexit is starting to feel like it’s all over bar the shouting for real estate.
Miles Gibson is executive director of UK research at CBRE
