How would a Brexit affect the commercial property market?
On 23 June 2016 British citizens are being asked to cast their vote to decide if the UK should remain in the EU or not. We look at how, and if, a Brexit would affect the commercial property market.
Before a single vote has been cast, the shadow of the EU referendum has fallen over the UK economy in the form of uncertainty. While GDP has increased by 0.4% between Q2 2015 and Q1 2016, continuing the run of 13 consecutive quarters of positive growth since Q1 2013, the British Chambers of Commerce has suggested that the UK economy has softened in the first quarter of the year. The Bank of England also notes that while consumer spending remains resilient, annual rates of activity growth have slowed, reflecting both shrinking world growth and an increase in unease.
Analysts on both sides of the debate are producing statistics which they claim enhance their arguments. The London School of Economics and the Centre for Economic Performance are predicting that UK GDP will fall by up to 3.1% if the UK decides to leave, while other economists are forecasting a rise in GDP of 10%. While nothing in this debate is certain, we now look at how both scenarios might affect commercial property in the UK.
The case to remain
Before the Scottish referendum on independence in 2014, there was a 10% fall in property sales in the eighteen months running up to the vote. However, after the result, the market caught up. The organisation expects commercial property investors to behave in a similar manner in the EU referendum, and delay any decisions until after the vote has been cast.
It seems that this scenario has already begun, with commercial property in London being affected by this uncertainty. Several commercial property fund managers have changed their pricing basis which has, in effect, cut values by between 5 – 6%. It has been noted that investors are unwilling to commit to, for example, long term construction projects given the prevailing atmosphere of uncertainty which may affect tenant demand, post-Brexit.
The IMF and the Treasury have also warned that house prices could fall dramatically. The National Association of Estate Agents has put this figure at £2,300 outside London and £7,500 in London. And while this might seem to be a blessing for first time buyers, the Association of Residential Letting Agents has warned that because of the reduced amount of demand for housing (due to fewer people immigrating from the EU) landlords could be forced to cut rents or sell up altogether having found the situation financially unviable.
However, it’s feared that it is in London’s commercial property sector that the worst of the Brexit effect would be felt. Experts argue that many EU companies, particularly investment banks, would move to the continent, vastly increasing the rates of vacancies within offices. Some warn that rental growth could also be negatively impacted by a slowdown in GDP and the uncertainty surrounding any future trade negotiations.
The case to leave
With just over three weeks to go, the polls are as close as they can be – The Economist’s latest Brexit poll tracker shows that 40% want to remain, but the leave campaign has almost as much support, with 39% of people wanting out. Many of the Brexit arguments are founded on the amount of money the UK contributes to the EU – some say as much as £350 million every week – and the unaccountability of EU officials – none of whom are elected here.
HIS Global, a company providing decision-making support for business and governments through information and analysis, has put forward a view that a Brexit would have a long-term positive impact on the UK, in terms of economic consequences, as well as a more homogeneous and clearer EU. Leave campaigners also point out that in the wake of a Brexit, the UK would be able to develop new trade agreements with not only Europe but also developing countries in the world, with whom we currently do not deal.
Those in favour of a Brexit are sceptical of the forecasts of economic doom and gloom were the UK to leave the EU. They claim that Brexit could have a positive impact on job creation and growth, leading to a surge in the economy. Any short-term impacts, they argue, would be outweighed in the long-term by a short period of adjustment in, for example, the UK’s inflation rate and the cost of borrowing, which is most likely to affect those interested in the commercial property market, and that this period of adjustment would last for a matter of months, rather than years, as implied by those who are in favour of remaining.
Amidst claims and counter-claims, polls, opinions and forecasts, the truth is that none of us can know how the commercial property market, as well as the wider economy, will be affected by a vote to leave. As we gaze into our crystal ball, the mist will not clear until after the result has been announced and, as we vote on 23 June, we need to take a balanced and impartial view of the facts and make an informed choice on an issue which will impact all our lives for many years to come.
Written by: Steven Jones on Wednesday 01/06/2016