When the referendum result came in last Friday morning, the markets went into freefall, with many commentators comparing the impact - unfavourably - to the great crash in 2008.
Sterling has plunged and with it the value of many FTSE-quoted property firms. So just where do we go from here? Are we on the precipice of another financial crisis? Or is the landscape more nuanced than the headlines suggest?
01. What happens if the City loses its ‘Financial passport’?
This is one of the biggest questions for commercial property. Provided banks continue to be able to trade across the single market, the exodus of jobs from the City may not be too severe. If the passport is revoked, however, the consequences could be deeply damaging, with all the implications for occupancy rates, rents and pricing that entails.
This was reflected in the stock markets: the shares of listed property firms with exposure to the London office market took a battering.
“Central London offices are particularly exposed to leave risk,” says Chris Urwin, head of global research at Aviva Investors. “Some activities currently undertaken in central London, such as euro-denominated wholesale banking, are under threat.”
Already the big banks are scenario planning for life after Brexit, with Dublin, Frankfurt and Paris - and possibly even Edinburgh - likely to be beneficiaries from any City exodus. Undoubtedly, preserving the financial passport will be a key ‘ask’ in the UK’s negotiations with EU leaders; whether a deal can be struck remains to be seen.
02. What does the fall in the value of the pound mean?
While it is a massive issue for the wider economy, it is not necessarily a bad thing for British manufacturers exporting to the rest of the world - or those trying to attract foreign investment into UK property.
“Every risk is somebody else’s opportunity,” says James Beckham, head of central London capital markets at Cushman & Wakefield. “With the rebasing of sterling against other currencies, overseas investors are being drawn in to the London real estate market. Whenever there is uncertainty, there is a flight to core cities and a flight to prime real estate in core locations.”
Bruce Dear, real estate partner at Eversheds, reports that he has already received calls from investors based in the Far East looking at potential investments in London. “I think it’s likely there will be a correction in property prices,” he says. “So I think there will be a lot of opportunities, particularly for inward investors and some of the larger institutions.”
But others are in two minds. “We caution against making acquisition decisions based on currency alone, but clearly the move in sterling against many safe-haven currencies creates a value proposition, especially if you believe sterling has found its floor,” says Andrew Angeli, head of UK research at CBRE Global Investors. “We are advising clients to be patient. In 1992, after the UK crashed out of ERM, it took six weeks for sterling to find its nadir.”
03. What impact will it have on deal volumes and occupier demand?
The ongoing uncertainty is bad news, especially if it goes on for years, but the industry had braced itself for Brexit and the initial aftershocks have not been as severe as many feared. Early reports are of 50% of deals that were on the cards going ahead while 50% are being reviewed.
As one regional developer puts it: “The world still moves around. People still want to occupy an office or retail space. The main issue in the short term is probably going to be funding. The banks are not saying no, but it might take a few weeks longer to get deals over the line.”
Others are even more bullish. One regional agent says it has had no impact whatsoever so far: “The enquiries we have tend to be local occupiers - they’re generally not inward investment. With the local business community if they have property issues - whether that’s around the quality or size of space or leases coming to an end - then logic suggests they will still do something. The question is: is it going to be the same decision or will they make some kind of allowance for what they perceive to be a change in circumstances? That we don’t know yet.”
However, Ciaran Carvalho, senior partner at Nabarro, is more cautious. “We have seen that in the majority of the deals that were major commitments on the buy side, they are either trying to pause the deal or they have triggered the Brexit clause,” he says. “Where there are clauses, people are exercising them and either saying we’re not going to proceed or are going back to negotiations. They are terminating the deal or are having a think.”
His view is echoed by Colin Wilson, head of UK & Ireland at Cushman & Wakefield. “We’re just focusing on our clients,” he says. “Some of them are pressing ahead with deals and others are waiting to see how it plays out.”
04. Which occupiers will be affected?
Foreign companies could hold fire on setting up a base or European HQ in the UK until the terms of our disengagement from the EU are clarified.
“The spectre of uncertainty will hang over Britain for the next two years,” says William Newton, UK director at proptech firm WiredScore and a former adviser to David Cameron. “Global business will delay making decisions on investment until both the immediate political landscape takes shape and we establish our future trading arrangements with Europe and the rest of the world.”
Certain sectors are likely to be harder hit than others. We’ve heard plenty of alarming figures regarding the potential number of banking and financial jobs that could be relocated to other locations in Europe, although experts point out it would be phenomenally expensive to do. It is harder to read what will happen to sectors such as proptech and fintech, with some predicting a talent exodus to cities such as Berlin, while others argue that London’s status as a tech hub will be preserved.
“I think it will impact confidence more than anything in the short term, particularly for those looking for investments and venture capitalists taking their time rather than just jumping in,” says James Dearsley, a leading proptech consultant at Digital Marketing Bureau.
Sectors with more of a domestic focus are also expected to emerge fairly unscathed. “I don’t think it will have a big effect from a logistics perspective,” says Andrew Jones, chief executive of LondonMetric. “It’s very much an internal market. It’s not like I’ve got Morgan Stanley as a client telling me it’s going to send 2,000 people off to Germany.”
05. What will it mean for agents?
In Property Week’s Agency Survey last week, we revealed that 60% of firms expected staff numbers to increase in the next 12 months. But that was then. The Institute of Directors this week reported that a quarter of its members anticipated a recruitment freeze, a third expected to keep recruiting at the current rate and 5% anticipated cutting jobs.
In the agency world, the fear is that if there is a sharp slowdown and investment and lettings deals dry up, agents will be left sitting on their hands. If that is the case, firms may be forced to review their headcounts. “The agents act very quickly in circumstances like these - jobs could certainly go,” says one industry insider.
06. What’s going to happen to workers from the EU?
It’s not clear, but it’s looking likely that EU workers already resident will be allowed to remain; this was a pledge made by the ‘leave’ campaign and confirmed by Conservative MEP and leading Brexiteer Daniel Hannan soon after the result. “We’ve already had Hannan come on and pour cold water on any notion of foreign nationals working in the UK having to go back,” says Michael Dean, principal at Avamore Capital. “It’s reassuring. I’ve got a Bulgarian guy who works for me. He’s brilliant and ultra-loyal and it makes me glad that I won’t have to see him go.”
However, it is far less certain that freedom of movement will be maintained, particularly for lower-skilled workers. For the construction sector, losing EU labour could exacerbate the industry’s skills crisis and drive up costs. “Labour costs worry me a bit. Construction is heavily reliant on foreign labour, so there are clearly labour issues,” says Edward Ziff, chief executive of northern developer Town Centre Securities. “A lot of the pressures will be on rising costs.”
07. Who will be the major political casualties?
The body count is growing by the day. David Cameron has already announced his departure, and although George Osborne is possibly eyeing a cabinet role many think he “is toast”. Meanwhile, the implosion of the Labour party continues to be played out before our eyes.
The upshot is that we do not just face a leadership vacuum but also a gaping hole in the middle of government, which is likely to be filled by the Brexiteers and those to the right of centre.
The position of many ‘remain’ cabinet members now looks precarious. Communities secretary Greg Clark, who sits to the left of many of his colleagues, is thought to be vulnerable. Conversely, despite being ‘remain’, housing minister Brandon Lewis is expected to either retain his position - but in the cabinet - or take the top job at the communities department.
“I don’t think Brandon is in as much trouble as Greg,” says one source. “He’s more in the centre and he’s matey with back-benchers. He’s reasonably well-liked and he knows a lot about his subject.”
08. What about the housing crisis?
Housebuilders’ share prices have taken a massive hit and many fear the resi market could be in for a pronounced slowdown. With Osborne set to be shuffled out of his current role, housebuilders are also set to lose a great champion in the Treasury. What’s more, the housing crisis is likely to form a key plank of the Tory leadership election, linked as it is to that all-important referendum debating point - immigration.
“Developers, landowners and the housing sector as a whole need to understand that they are in the political firing line,” says Alex Morton, now an independent public affairs consultant but until recently an adviser to the prime minister on housing and planning.
The pressure will become more intense if a slowdown in the market translates into a drop in housebuilding numbers, exacerbating the crisis. Housebuilders blaming the slowdown on Brexit-related uncertainty are likely to be given short shrift by Brexiteer ministers.
09. What does it mean for infrastructure & devolution?
Controversial and expensive projects such as HS2 or the Hinkley Point nuclear power station could be under threat, and there are major question marks over how the National Infrastructure Plan (NIP) is to be delivered. The plan rests on factors including a strong economy and attracting international investment, notably from China. But it also relies on the European Investment Bank and other sources of EU funding.
The chancellor’s ‘northern powerhouse’ project and wider devolution agenda could also be fatally undermined. A fresh plan to attract greater volumes of investment from territories outside the EU will be sorely needed. “It will be interesting to see what new strategies will be developed to attract investment into the UK,” says Alistair Watson, head of planning and environment at Taylor Wessing.
10. What of the Heathrow decision?
The final decision was due to be made next week had the Bremain camp prevailed. But the Brexit result has wrecked all that. Granting permission for Heathrow’s expansion is at the best of times controversial, but for a new prime minister potentially facing a general election it would be suicidal. And if Johnson, a fierce opponent of Heathrow expansion, is the next PM then it will be back to the drawing board.
There are also technical issues that need to be addressed. The Davies Commission, which was set up to examine the various cases for increasing capacity, was predicated on the UK remaining part of the EU. Those assumptions now have to be binned.
11. Will Brexit simplify planning and environmental regulations?
Probably not. While the vast majority of planning law is set at a national level, some areas of law written into the planning system emanate from Brussels.
Such regulations could be scrapped, but if the UK retains access to the single market, it is still likely to have to comply with most EU environmental laws, says Martha Grekos, head of London planning and infrastructure at Irwin Mitchell, because “those laws also affect the functioning of the single market”.
Brexit would allow the UK to row back on EU-initiated carbon reduction initiatives such as Minimum Energy Efficiency Standards.
12. But it will cut EU red tape, right?
Yes. And no. The current regime requires all public sector contracts of any significant size to be put out to tender through the Official Journal of the European Union so European firms can compete on a level playing field. Leavers argue Brexit will allow the UK to dispense with EU red tape and open up trade relationships with other countries around the world.
“There is an increasing view that the EU-based procurement regime won’t be changing any time soon, due to the need to provide a level playing field for international investment,” says Robert Meakin, a partner at Clyde & Co. “But there may be a greater willingness for the UK to take a more flexible approach to its application, and not apply the letter of the regulations so rigidly.”
THE LONG ROAD AHEAD
The referendum result may be in, but the road to the UK’s exit from the EU still stretches out far ahead. Despite his pledge that he would invoke article 50 of the Lisbon Treaty - the key legal move required to trigger Brexit within two years - on the morning after a leave vote, prime minister David Cameron decided against it. The result is greater uncertainty, as well as a glimmer of hope for the ‘remain’ camp:
Do we have to invoke article 50?
No. Under the terms of the treaty, it is up to a sovereign government to invoke article 50. While of huge political significance, the referendum result does not oblige the UK government to invoke the treaty. Also, legal opinion is split over whether invoking article 50 would require parliamentary approval, and possibly approval from devolved parliaments.
Can the EU compel the UK to invoke?
EU leaders have made it clear that they expect the next PM to act swiftly to invoke article 50, but they cannot compel the UK to do so. “The notification of article 50 is a formal act and has to be done by the British government to the European Council,” a European Commission spokesman says.
But at some point it will be?
You’d think so, but it still isn’t clear. Cameron’s decision not to invoke article 50 last Friday seems to have been deliberate, both politically (‘clear up your own mess, Boris’) and strategically. It raises the possibility that the article will never be invoked at all if better terms than Cameron negotiated last year can be secured. While it still seems overwhelmingly likely that the UK (or at least most of it) will leave the EU, the door is still ajar.
“Every day that article 50 isn’t invoked reduces the chances of us ever invoking it,” says Michael Dean, principal at Avamore Capital. “I’d put a 40% probability on us not leaving the EU by 2020. I think it’s a referendum where everyone gets screwed.”
So what’s next?
All eyes are now on the Conservatives’ leadership election. Theresa May (reluctant ‘remainer’) and Michael Gove (leading Brexiteer) are the favourites: what they and others promise to do in terms of article 50 and the ‘red lines’ they set out for forthcoming negotiations with the EU will be key. Meanwhile, Labour will try to elect a new leader - and businesses will hope that the initial market volatility will settle down while the politicians come up with a plan.