The Brexit blog - Uncertainty and opportunity.
Unique circumstances also present considerable opportunities for informed investors and in particular, international investors may wish to take advantage of the current devaluation of the pound. Furthermore, the underlying fundamentals of the UK economy as a centre for business, technology and innovation remain strong, leading to an expectation that the commercial property market will demonstrate resilience in the medium to long term.
Challenges
Reduction in transactions
In the lead up to the EU referendum, the UK commercial real estate market experienced a period of decreased transactional activity: this trend is likely to continue in the short term, as some investors hold off on decisions in light of the market volatility and uncertainty arising from the negotiation of the exit process from the EU.
Several planned London property developments are under review, including the proposed 62-storey skyscraper at 22 Bishopsgate, which was acquired in 2015 by an international consortium led by AXA, the French insurance company. The Crown Estate has also announced the review of two developments, including a luxury residential and retail development and a 36,000 sq ft office building.
Drop in occupier demand
There is also the potential for a reduction in occupier demand, particularly if the UK leaves the European single market. The London office sector, especially in the City and Docklands is most likely to be affected if the UK appears likely to lose rights to “passport” financial services.
However, it is important to note that large numbers of global businesses are dedicated to markets beyond the EU, and as such, will continue to require a UK office presence. A further mitigating factor is that office vacancy levels in areas such as Central London are currently lower than at levels preceding the credit crunch crisis. There may be a move to shorter leases: however, impacts on rents are likely to be offset against limited office supply while current 10-15 year leases are in place. The Chancellor of the Exchequer has proposed to cut corporation tax from 20% to 15% in an effort to encourage corporate occupiers to remain in the UK. It remains to be seen whether the government will introduce any additional incentives for occupiers.
Uncertainty and global economic considerations
Negotiating the terms of Brexit is expected to take years and in the words of the Chancellor the UK is entering a ‘prolonged period of economic adjustment.’ There are also wider considerations that will have an impact on the UK commercial real estate market, including the economic slowdown in China, low oil prices, and the potential for a Euro-zone debt crisis.
Opportunities
Strong fundamentals
The UK is internationally recognised for its system of the rule of law, democratic institutions, and overall transparency in the real estate market. Moreover, the UK is a significant business destination in its own right. The Bank of England’s recent announcement that it is on standby to pump in £250bn of liquidity to support the markets, illustrates the robust contingency plans in place. Despite the current uncertainty, it is argued in some quarters that the Brexit vote may eventually bolster London’s global reputation if it is discharged of the financial regulations driven by the EU.
Devaluation of the pound
The dramatic fall in the value of the pound to its lowest level in over 30 years has created opportunities for global investors to acquire commercial property at discounted prices. The collapse of the pound in 1992 and 2008 followed a period of economic growth, and it is possible that the combination of lower prices and the devaluation of sterling will be a catalyst for overseas investors looking to purchase commercial property assets, if international finance remains readily available.
Interest rates
There is speculation that the Bank of England may reduce interest rates from their current level of 0.5% to zero in order to shore up the economy. This would be a welcome move for property investors, as it would lead to reduced debt costs. UK gilt bonds have also fallen to their lowest level ever causing property yields (although lower than they were) to appear attractive in comparison.
Comment
Despite the current uncertainty which is expected to last until the government is in a position to provide a clear sense of policy direction, at the time of writing it is anticipated that in the medium to long term the UK commercial real estate market will demonstrate its resilience and adaptability. Much will depend however on how much access the UK will have to the European single market. In the long term, the UK commercial property market is expected to continue to offer higher returns than most alternative asset classes, and retain its status as an attractive and secure form of investment.
This article was written by Simon Ewing and Raza Anjum. For more information please contact Simon on +44 (0)20 7427 5330 or simon.ewing@crsblaw.com
