There are several areas of issue for the Real Estate sector. One is in the run-up to a referendum, which may create a period of instability and stagnation in the property market, whilst people think about what may happen if there were to be a Brexit or what would happen if we stay in. Now that in itself can manifest opportunities for investors because they see the market stalling and that should mean that prices come off and therefore, it could present an opportunity. But I think the more likely concern is that if people believe a Brexit will really happen, that that may just create stagnation.
We’ve definitely seen transactions that are now not proceeding because of Brexit [threat]. Indeed, there was a transaction only last week, that had started and has now immediately been put to a stop, when it went to investment committee. The investment committee have said there is too much uncertainty around Brexit so they won’t now proceed with it.
There are really several areas of concern around Brexit. One is what happens to tenant demand. You’ve got things like the manufacturing industry and the financial services industry. If you believe that jobs will be lost and that jobs will go into the EU, rather than into the UK, then that reduces tenant demand, which is the thing that underpins investor demand. So, in the medium term and the longer term, if jobs come out of the UK and go into what remains of Europe, then that is a bad thing for the UK real estate. So you’ve got that potential area of concern.
Now if you look at the manufacturing industry, it may take a very long time for that to manifest itself. If an inward investor or a large multinational corporation is deciding where to locate a new manufacturing plant — would they do that within the EU market, where they have got access to a free market, or would they come to the UK. Now you could see the UK deciding to offer grants and subsidies in a way that would currently be precluded by being a member of the EU, or you could see the manufacturers looking to go to somewhere that is within the free trade zone.
On the positive side, there is such a weight of international capital that wishes to be deployed in the real estate market, that it is unlikely we are going to see any major correction in capital values in the UK, particularly in prime areas, like London, because the weight of that capital is needing to find a return that is more than the half or one per cent that you can get by putting the money in a bank and more than you can get with the risks that the financial markets currently offer. So real estate, particularly in a very liquid and stable market like London, will continue to be a highly attractive asset class for people that have got large amounts of money that they wish to put away for long periods of time. So there is a potential benefit. Also, the thought is that if there is a Brexit, our currency will weaken, which will make asset prices even cheaper in the UK — so there are some real positives about Brexit, but not necessarily long-term positives.
The other thing that I would say about Brexit is whether or not that leads to another Scottish independence referendum. The property market went through a period of stagnation in Scotland just before the last referendum. If this would allow the SNP to say that the fundamental basis for staying with the United Kingdom has changed and therefore, that they would like to call another referendum so that they can stay within the EU or apply for new membership, then I think that creates a further level of uncertainty.
So, all in all, I would say that Brexit, and the mere fact that we are going to a referendum, is the bad bit. I think markets adjust quite quickly and will find their own level once the period of uncertainty has passed.