The 6 Questions Brexit Leaves Hanging Over UK Real Estate

Over the next week or so, there should, in theory, maybe, be a bit more clarity about the government’s new strategy for Brexit in the wake of last week’s historic defeat for the plan put forward to Parliament by Prime Minister Theresa May.

There are a little more than two months to go until Britain is set to leave the EU. Here are the key unanswered questions London and UK real estate professionals are pondering as the reality of Brexit approaches with little information about what it will actually entail.

1. How Will Overseas Investors View London And The UK As An Investment Prospect?

In the Urban Land Institute and PwC’s Emerging Trends In Real Estate Europe report last autumn, European real estate investors ranked London as above only Moscow and Istanbul in terms of future prospects. Yet London saw the largest level of investment of any city in the world in 2018 according to JLL, at around $37B, ahead of New York at $31B. Thus far, investors are backing the long-term prospects of London with hard cash. There is a sense that investment is slowing due to the current uncertainty, and whether global investors would continue to back London in a no-deal scenario is unknown.

2. Can Office Leasing Volumes And Coworking Companies Continue To Perform?

Against all expectations, Central London office leasing levels have gone up since the Brexit vote in June 2016. In 2018, 13.7M SF was leased, according to CBRE, compared to 13.4M SF in 2017 and 12.3M SF in 2016. Domestic and global companies have continued to take new space in London, but the nature of the UK’s exit from the EU, or indeed a reversal of the decision, would impact this.

Intertwined is the fate of the flexible office sector. A big driver of leasing performance has been flexible office operators, which took around 15% of Central London space in 2018, rising to 31% in the fourth quarter. An exit from the UK that caused an economic slowdown would test the resilience of a sector that has grown rapidly during an economic boom.

3. Will The Immigration Tap Be Turned Off?

The question of immigration has been central to the debate around Brexit. Certain areas of real estate would suffer severely if, as a large part of the electorate and politicians want, immigration is reduced to below 100,000 new migrants a year. Estimates indicate that more than 50% of workers in London construction are EU migrants, and other sectors like hospitality and care homes would also face severe staff shortages if immigration was curbed.

4. Will The Cost Of Imports Rise Further?

The retail sector is being challenged by growing online sales and declining consumer spending, and Brexit also hurt UK retailers: The falling value of the pound has made imports more expensive at a time when passing the cost on to consumers is difficult. A Brexit result that causes the value of the pound to rise will be beneficial to retailers and thus retail property owners, and vice versa. Current estimates from the currency trading world are that the value of the pound will rise.

5. How Might Supply Chains Be Impacted?

At the moment, with talk of stockpiling everything from medicine to food to car parts, it might seem Brexit is good for the logistics sector: The need to store things creates the need for more warehousing. But UK logistics vacancy rates actually rose in Q4 2018, and longer term, an exit from the EU that makes it more expensive for manufacturers to import parts and manage their supply chain could have a major chilling effect on UK industrial property.

6. Will We See Another Run On Open-Ended Funds?

In the wake of the 2016 Brexit vote, the biggest point of distress in the UK real estate market was the open-ended funds sector, which saw huge outflows of cash from panicked mom-and- pop investors, and forced managers to sell assets to meet redemptions. The managers of these funds have built up cash reserves, and longer term, regulators are looking at ways to avoid the same problem repeating itself. But in the short term, as March approaches, there is no way to ensure that the fact these funds are inherently illiquid won’t cause them to close their doors again.