Referendumbed Down: What would a Brexit mean for the prime resi sector?

It’s a rare event that commands such raging ambivalence. Both factions of Britain’s latest European question – the In Crowd and the Out Siders – seem to have utter,...
Henry VIII

It’s a rare event that commands such raging ambivalence. Both factions of Britain’s latest European question – the In Crowd and the Out Siders – seem to have utter, incandescent commitment to their cause, yet arguments on both sides rely more rhetoric than anything concrete, and the majority of the population – and the prime property industry – are distinctly ambivalent on whether Britain should remain in or leave the EU.

Read in-depth musings by Trevor Abrahmsohn, Charles Curran, Ollie Marshall & Jennet Siebrits on whether we’re better In or Out of the EU here.

The man behind the original Brexit, in the 1530s: Henry VIII (by Hans Holbein the Younger, c.1542)

The man behind the original Brexit, in the 1530s: Henry VIII (by Hans Holbein the Younger, c.1542)

A majority of right-minded businessfolk – including the Bank of England’s Financial Policy Committee – have set up camp on the European side, appealing for the relative stability that a Remain vote would deliver. Carter Jonas surveyed its clients in January to discover that, of this pretty compelling cross section of the real estate industry, 65% are anti-Brexit and 10% would actually consider relocating their businesses should Britain go it alone. Feelings were particularly strong amongst the high-value residential client segment: “Demand for housing may weaken, notably for high-end residential in London and the South East” if there is a Brexit, said Carter Jonas, “as more skilled workers and executives choose to relocate to mainland Europe.”

Savills’ research team appears to be rather more sanguine about the whole affair, arguing that “the medium-term implications of the result of the referendum are relatively unimportant for real estate.” While uncertainty in the run-up to Referendum day may have some impact on transaction volumes, particularly where international buyers are involved (i.e. PCL), “it is highly unlikely that it would cause the UK housing market as a whole to freeze,” says Savills, and, at the end of the day, “the drivers of death, debt and divorce, together with the needs of upsizers and downsizers, will continue to drive turnover.”

[pullquote align=”left” cite=”Oxford Economics” link=”” color=”” class=”” size=””]Any upside effects of a Brexit appear to be limited and the worst-case scenarios are far from disastrous[/pullquote]

Think tank Oxford Economics is mildly more troubled by the thought of leaving the Union. “The implications of Brexit for the UK economy, business and consumers could be substantial and far-reaching,” it argues, estimating that a best-case scenario following a Leave vote would be a 0.1% drop in Britain’s GDP but a whole £40 increase in income per head by 2030; the worst-case scenario, if post-referendum negotiations don’t come up smelling of tulips, is a 3.9% loss of GDP and a £1,000 loss of income per head by 2030. Pleasingly, however, Oxford Economics is not as brash as many in its conclusions. The organisation instead channels the nation’s slightly cautious ambivalence: “Any upside effects [of a Brexit] appear to be limited and the worst-case scenarios are far from disastrous.”

Eurosceptics – including that enduring bunch who have been chanting from the Tory back benches since the seventies – are talking up the benefits of political independence from the EU (less admin, mainly, and a more healthy distance from the troubled euro), arguing that bilateral agreements between nations are stronger and more influential than fractious consent from the “ever closer union”. Iceland, Norway and Switzerland – countries outside of the EU and euro currency, but still inside the European Economic Area and/or Free Trade Zone – are heralded as examples of what Britain could be, with soul-nourishing independence twinned with similar economic benefits to the current in-EU situation.

But the certainty of uncertainty – an exit would inevitably lead to at least two years of international wrangling over trade treaties and sundry legislations – is a compelling argument to stick to the status quo. The argument may be familiar to anyone who’s dealt with basement extensions in London in the last couple of years: it’s the short-term construction kerfuffle that drives most opposition, with an underlying – and usually baseless – fear of foundations being rocked. Except that we’re not hoping for a natty cinema room or spa suite with this vote…

And it’s worth noting here that status quo is nearly always the favoured option in EU-based polls: The Spectator recently reported that 60% of Icelanders, 79% of Norwegians and 82% of Swiss prefer their “outsider” stance to the option of EU membership. “Who can blame them?” asks The Speccy’s Daniel Hannan: “Norway and Switzerland are the wealthiest and second-wealthiest nations on Earth.”

While our own economic heft – significantly bigger than Norway and Switzerland, which have both managed decent trade terms with the Union – means that Britain will more than likely end up in a strong position regardless of the referendum result, uncertainty in the run-up to and during any fall-out from a vote will probably have a serious impact on business and industry. “The referendum is, arguably, the biggest choice facing the UK for 40 years – since the 1975 referendum on remaining in the old European Economic Community,” says Carter Jonas. “The economy and property sector are likely to be affected by the pre-vote uncertainty, as was the case in the run-up to the Scottish referendum in 2014 when there was a marked ‘wait-and-see’ approach to decision-making. Clearly, a much greater impact will be seen in the event of vote to leave.”

Think Tank Open Europe believes that exports, while “vulnerable to initial disruption”, would, in the long/medium term, be largely unaffected by a Brexit. Access to and provision of services, however, could get a whole lot more tricky, particularly in that load-bearing column of the prime London property market, financial services; access “might come with conditions attached,” says the think tank.

While Carter Jonas’ survey is far from comprehensive, responses from 69 of UK real estate’s major players (across both residential and commercial sectors) are telling – and very one-sided. “A clear majority believe that a Brexit would have a negative impact on the UK property sector, both from an investment and occupier perspective,” says the agency.

If the result does go that way, we’ll be in for a couple of years of hardcore to-ing and fro-ing with EU member countries over trade deals; those negotiations could go well – or they could go badly. Either way, uncertainty during the chats could be disastrous for economic activity in the UK. “Heightened uncertainty could test the capacity of core funding markets,” warned the BoE at the end of March.

If there is a vote to stay in, however, Carter Jonas would “expect a bounce in economic and property market activity, following the uncertainty of the referendum campaign – a swift return to ‘business as usual’.” Savills is less confident in a post-Referendum bounce, arguing that “any ‘relief rush’ is likely to be tempered by mortgage regulation in the mainstream market and taxation constraints among investors and in the prime London market.”

A “Bad Brexit” scenario could hit the residential market hard, says Carter Jonas: “Demand for housing may weaken, notably for high-end residential in London and the South East, as more skilled workers and executives choose to relocate to mainland Europe.

“A ‘Bad Brexit’ might deter international students (‘talent’), thereby reducing demand for high quality, purpose-built student accommodation. This would be exacerbated if the government also adopts a more anti-immigration stance. The biggest impact would most likely be felt in London and Manchester (Imperial College and Manchester universities both attract over 11,000 international students), while other key university towns, such as Oxford, York, Cambridge and Bath might also be affected.

“The mainstream residential market would experience less of a direct impact, although it may be affected by the wider economic consequences of a ‘Bad Brexit’. However, on the upside, a potential weakening of sterling would boost the purchasing power of foreign buyers.”

Brexit implications Carter Jonas

Some of the biggest names in the industry have also come out individually to warn of the potential dangers of a Brexit: speaking at a Movers & Shakers property event in February, head honchoes at Land Securities, Grosvenor and British Land all revealed nerves over the expected referendum.

Rob Noel, Chief Executive of Land Securities, said the vote would create uncertainty and lead to “nervousness among companies” as “no-one knows what a post-EU landscape looks like and no-one will know for a long time… it’s a very big risk.”

Peter Vernon, Chief Executive of Grosvenor, said he was in “violent agreement” with Noel: “With the out vote, we don’t know what we are voting for and there will be uncertainty for quite a period of years while negotiations take place”, and Chris Grigg, Chief Exec of British Land chimed in to say that industry and markets value certainty above most things.

Uncertainty is likely to be the big market-killer in the short-term, concurs London estate agency Winkworth, but a Brexit could also have a knock-on effect on property prices if, as expected, immigration from Europe falls. The firm notes, however, that the reverse is also likely to be true for mainland Europe: “There may be implications for UK buyers looking in mainland Europe should we exit the EU,” says David King, Head of Winkworth’s International department. “If, following an exit, extra rules were introduced for British buyers such as visa or money checks then the process could be more difficult. However, as with the UK, investment by overseas buyers is more often than not welcome and as such I cannot foresee any stipulations being too problematic. Instead it is likely that those looking to buy will just need to make sure they can confidently negotiate the process, which a good estate agent and lawyer with experience in these markets will be able to assist with.”

Here are a few more opinions from the prime resi industry on the European question, or read some in-depth musings here:

On Brexit

  • Paul Munford, CEO, MCIFA

[pullquote align=”right” cite=”” link=”” color=”” class=”” size=””]A withdrawal from the EU may not be taken well by the German, French and Italian investors in London[/pullquote]

“The EU has fostered the Financial Services industry with a huge extra burden of bureaucracy regulation and a large amount of unnecessary processes. We have no idea whether this avalanche will recede if we leave, in fact it is unclear if it would make an impact at all. In terms of the prime real estate market, a withdrawal from the EU may not be taken well by the German, French and Italian investors who have been active in central London. This coupled with economic factors means that a stay vote would be the better option.”

  • Simon Barry, Head of New Residential Developments, Harrods Estates

[pullquote align=”right” cite=”” link=”” color=”” class=”” size=””]We know just how fierce the retail competition from Europe can be[/pullquote]

“From the Harrods Estates perspective, we know just how fierce the retail competition from Europe can be. So we are worried the market is underestimating the negative impact on PCL of European capitals stealing business away from London in the event of Brexit. If this happens, sooner or later it will weaken the depth of the PCL market, certainly at the high end.”

  • Charles Smith, Managing Partner, London Real Estate Advisors

[pullquote align=”right” cite=”” link=”” color=”” class=”” size=””]Despite the ‘leave’ camp having a bit of traction now and a lot of noise and PR, the sensible vote will be to stay[/pullquote]

“I think here is some real uncertainty behind the consequences of Brexit, and truth is of course we don’t really know what these will be. I do not think there will be fundamental, if any, changes to the taxes on property ownership for EU/non EU nationalities, nor can I see an issue on the income from rental properties being repatriated to an EU country if we leave, on a tax or administrative level.

“There would be residency issues for the UK nationals living in the EU of course, and more importantly – as far as the property market is concerned – significant changes to foreign exchange rates.

“I think in the shortish term after Brexit, with trade deals suspended, big scale foreign investment into the UK uncertain and free movement of labour force restricted, the pound will remain weak, bringing greater amounts of foreign investment into the UK. It would be ironic if the Conservative government, which introduces a 3% SDLT levy on second home ownership aimed at deterring and slowing down the rate of rich foreigners buying here, then utterly undermines that by forcing a Brexit vote on people, collapsing the pound further and increasing the number of foreign buyers. That might help the HMRC coffers, but will have the opposite effect on releasing some pressure on the housing market.

“If that does happen,  as a result, the ability of less overseas currency to buy more pounds will mean more trades to foreign buyers, which will push up house prices.

“That means of course, that  if you are relying on taking x pounds of UK income and turning it into y euros wherever you may live in the continent, the weak pound is seriously going to curb your income. Not clever.

“The fact we have got into this position due to the right-wing conservative back benchers is ludicrous really, but I suspect despite the ‘leave’ camp having a bit of traction now and a lot of noise and PR, the sensible vote will be to stay.

“I hope so anyway.”

  • Richard Bernstone, Director, Aston Chase

[pullquote align=”right” cite=”” link=”” color=”” class=”” size=””]The devil we know as being part of Europe must be better than the unknown consequences of leaving[/pullquote]

“Regarding the ‘Brexit’ question, I guess that probably, like the majority of the country, I do not understand the longer term pros and cons of staying or leaving Europe let alone the complex minutia of any decision which will be realised.

“What I do understand is that the devil we know as being part of Europe, with the possibility of improving the terms of our membership, must be better than the unknown consequences of leaving  – a choice which is being propagated by scaremongers preying on our insecurities relating to immigration, and the relentless and often incomprehensible red tape which comes from Brussels.

“It’s easy to forget that  European countries have historically been at war with each other over past centuries and as one of the three main pillars of the European community alongside Germany and France our continued membership could well help to avoid such conflicts in the future.

“With Great Britain out… the union may well suffer further losses and then we could be faced with much bigger issues than immigration.”

  • Mark Parkinson, founding Director, Middleton Advisors

[pullquote align=”right” cite=”” link=”” color=”” class=”” size=””]The pros and the cons may well simply neutralise the effect on the property market[/pullquote]

“Realistically, we are looking at uncertainty all the way up to 23 June, but it may well be that the pros and the cons, in the end, simply neutralise the effect on the property market. On the plus side, the consensus is that sterling will be devalued, making London property cheaper to foreign investors worldwide, who already regard London as a high-performance, safe asset class. And, there is an argument that detaching a relatively strong economy in a politically stable country from Europe may actually increase its attraction to investors.

“Conversely, while the market-makers might enjoy the uncertainty, investors don’t. And the real impact of a “No” vote on the domestic market could take years to play out, inevitably putting some people off coming to live, work and invest in UK property until our relationship with Europe is established and any tax changes become clear. With many companies threatening to relocate away from the UK, a “No” vote could also add a whole new stream of supply to an already oversupplied market.”

  • David Hannah, Principal, Cornerstone Wealth Protection

[pullquote align=”right” cite=”” link=”” color=”” class=”” size=””]An exit from the EU sends a clear message to foreign investors and corporations, one group of which is housebuilders looking to enter the UK market, that they are not welcome[/pullquote]

“The Chancellor may well have delivered a vote-loser for the referendum in his latest Budget in the eyes of UK homeowners, investors and the wider property industry – hacking away any residual confidence that remained in the lead up to 23rd June.

“Buyers who were already holding off on transaction completions until the results came through are now reconsidering the UK entirely and may be looking to pull out of the market altogether. The prospect of an isolated Britain outside of the UK had already disturbed international buyers as people do not want their asset capital locked up in a country that has isolated itself from the rest of the world. But now the Government has taken one step further and demonstrated a willingness to consistently penalise both its own domestic buyers and international interest through a series of tax ‘initiatives’ which, once out of a wider economic union such as the EU, many fear could be taken a number of steps further.

“An exit from the EU also sends a clear message to foreign investors and corporations, one group of which is housebuilders looking to enter the UK market, that they are not welcome. Many of these interested parties will not only be large ‘property tycoons’ looking to build luxury prime location residences; but are in the business of building affordable homes for regular people too. The combination of a potential exit from the EU paired with the additional three percent charges will increase tax bill costs by as much as one hundred percent for some transactions, forcing many smaller housebuilders out of the market entirely.

“The Chancellor has said his vision is to build an ‘enterprise economy’ for Britain and this relies on the social and economic mobility of people made possible by EU free movement of skills and people. We are yet to understand the full implications of Brexit and the 3% surcharge on the property industry, yet funnily enough, whilst these entrepreneurial folk require skills and mobility, most importantly they need somewhere to live!”

  • Chris Patrick, Partner, Bruce Shaw

[pullquote align=”right” cite=”” link=”” color=”” class=”” size=””]A lack of clarity in a post-Brexit environment may at least temporarily recede overseas demand for luxury residential property[/pullquote]

“Overseas purchase (including that by Mainland Europe) has been a feature of the luxury residential property market. Many recognise that this is influenced by a number of factors including favourable stability in government policy, a common second language, clear property law, a favourable time zone and a robust economy. Much of what luxury UK property has to offer therefore is not directly threatened by a Brexit. However it is the uncertainty over the position the UK would be placed in under a Brexit that could create at least a less than direct impact on UK luxury property, with a potential reduction in demand created by activities such as finance and service providers relocating and taking higher earners overseas, or the opportunity for constitutional change such as mitigating the ability for overseas purchase of UK property, or an impact created on purchasing power by any adjustment in interest rates or exchange rates by a Brexit. Historically, uncertainty prior to voting has seen reductions in demand before referendums and national elections. Uncertainty in a post-Brexit situation could dampen demand until such time as a better appreciation of the market could be understood. In addition, until such a time as a post-Brexit landscape may be better understood, overseas finance and construction labour supply may also be abated, in turn stymying supply and, in the fullness of time, inadvertently affecting an upward price adjustment of this type of property in the future.

“Whilst a Brexit may not affect the domestic market’s demand for housing generally, a lack of clarity in a post-Brexit environment may at least temporarily recede overseas demand for luxury residential property and subdue the UK construction industry’s overseas labour supply, but demand and in turn prices and thereby supply seem they could well return in the medium to long term as the underlying benefits of UK property return.”

  • Alex Newall, Managing Director, Hanover Private Office

[pullquote align=”right” cite=”” link=”” color=”” class=”” size=””]Most of our clients seem to want to leave the EU[/pullquote]

“Markets hate uncertainty, and ‘wait and see’ is usually the cautious line most investors take in the run up to political change. Most of our clients seem to want to leave the EU as they feel they can weather any short-term storm which may come with the fallout. In the long run, economically most feel we are better off Out and the current EU is massively under-funded and unsustainable. However, for the most part western Europe has enjoyed peace since its formation,  something not to be forgotten by short-term economic gains. A common purpose is often what holds us together in a world of growing differences.”

On the run-up to Referendum Day

  • Naomi Heaton, Chief Executive, London Central Portfolio

[pullquote align=”right” cite=”” link=”” color=”” class=”” size=””]London is going to retain its attractiveness to wealthy international buyers regardless of whether the UK remains in the EU[/pullquote]

“One immediate impact of the prospect of a Brexit has been to hit sterling; between the end of 2015 and late February, UK currency lost 6% against the dollar and, over 18 months, the currency has slid almost 20% against the greenback. This serves to make UK property more attractive to dollar-based buyers; as is so often the case, opportunity is the other side of the coin to crisis and, if you add currency moves to the 7-7.5% falls we’ve seen in prices in Knightsbridge, for example, then prices are more than a quarter lower in dollar terms than they were 18 months ago. It’s certainly tempting some overseas buyers back into the market.

“London is going to retain its attractiveness to wealthy international buyers regardless of whether the UK remains in the EU; its cultural attractions, geographic location, legal system, and concentration of talent mean that there will always be demand for prime central London property.”

  • Louisa Brodie, Head of Search and Acquisition, Banda Property

[pullquote align=”right” cite=”” link=”” color=”” class=”” size=””]We expect bolder foreign buyers to see this as an opportunity[/pullquote]

“In recent weeks, the pound has hit a seven-year low against the U.S Dollar and softened against the euro as a result of uncertainty surrounding a possible Brexit following the 23 June Referendum.  Whilst uncertainty can be bad for the market as investors adopt a ‘wait and see’ attitude, we expect bolder foreign buyers to see this as an opportunity – and possibly even more so – if they are to avoid April’s new SDLT rates for second home/ buy-to-let purchases.

“The sub £1m market will continue to remain buoyant. However, the middle and prime/ super-prime markets are being heavily affected by a combination of SDLT increases, non-dom fiscal changes, new taxes on owning residential property in a company (ATED) and the recent battering of world stock markets. Transactions at the upper level are down around 50% due to a delay in decision-making, which has resulted in a shortage of stock being put onto the market by sellers and an unwillingness from buyers to commit to a purchase.

“Nevertheless, I am hopeful that we will see some shrewd European and U.S buyers take advantage as long as vendors are realistic in their price expectations.

“London property has always been affected by uncertainty one way or another and this is likely to continue until after the June referendum. Despite this uncertainty, it remains true to say that there is no other property market like London and this means long-term investors will continue to choose it as a place to invest their money.”

Read in-depth musings by Trevor Abrahmsohn, Charles Curran, Ollie Marshall & Jennet Siebrits on whether we’re better In or Out of the EU here.

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