The ongoing Brexit-related twists and turns continue to leave the property industry puzzled as to what may be around the corner. Where possible, decision-making is being stalled until there is at least some clarity with regards to our future relationship with the European Union.
With the sector’s performance closely correlated to the ebbs and flows of the wider economy, commercial property investors and developers are growing particularly concerned.
Is the commercial sector really heading towards a downturn as a result of Brexit?
The truth is that nobody really knows and any predictions – yes, even those by the Bank of England – are frequently based on speculation not predictable facts.
The bullish often refer to events after the 2016 referendum result when, despite a period of slow growth in the following months, the market recovered. Any correction, they believe, has already been priced in. Furthermore, commercial property owners are much less geared relative to their positions in the post-crisis environment, and they remain somewhat buffeted by historically low borrowing costs.
Talk of an ‘exodus’ of financial institutions and investment capital from London to cities like Paris, Berlin and Dublin have also largely been over exaggerated. Of course, nobody believes that the risks are insignificant, but likes of Facebook and Apple taking up large floorplates in the capital is a testament to a certain level of faith in the UK’s ‘safe haven’ status. Other central business districts like Manchester, Leeds, Birmingham and Bristol have also continued to thrive.
At the other end of the opinion spectrum, there are those underlining that only when the country formally exits that the impacts will be truly felt. With the CBI deputy-general Josh Hardie stating that ‘the UK’s reputation, people’s jobs and livelihoods are at stake’, commercial property may be stepping into a period of higher vacancies, slower development and falling rents. There’s a growing body of evidence that Valuers have been including ‘Brexit clauses’ to protect their own positions if such events come to fruition.
Future investment decisions by manufacturing and assembly businesses linked to the EU (pharmaceuticals, automotive, aerospace and steel) remain in jeopardy. Accompanied by reduced wages, unemployment and stagnating disposable income growth as a result of Brexit, business occupancy levels may well drop off.
Any closer our relationship with the EU moves towards a harder direction, the likelihood of a depreciating Sterling grows – which, in turn, boosts the costs of property development. The silver lining here is that, despite the heavy tax burden, international buying interest in commercial property could grow – potentially buoying the market.
Let’s not completely blame Brexit…
However, to denounce any potential commercial property woes as entirely attributable to Brexit would be unfair.
For instance, the growth of tech-driven retail and the decrease in demand for physical high street space is an inevitable shake-up that will occur regardless of Brexit.
Similarly, in the office space, it is estimated that some 2 million people work from home and the growth of flexible working arrangements is already becoming normalised. Small and medium-sized businesses of all sizes have become more reluctant to sign longer leases and are negotiating better terms with break clauses. More business will continue to adopt a more remote, lean style of operating which, in turn, may well affect the office model. The effects of rising business rates and other regulatory controls will also continue to weigh in on the question.
One thing is for sure; there’s no foreseeable end to the political wrangling…
As the country transitions, the best investors and professionals in the sector can do is to prepare for the worst and hope for the best. What’s particularly essential is a fixed agreement ‘playbook’ that will enable the sector – unencumbered by a lack of clarity – to plan against risks, however, grave they may be.
It’s well worth keeping a watchful eye on the financial markets, SWAP / LIBOR rates, Bank of England decision making and the sentiments of business leaders. The possibility of a Labour victory in a General Election is another notable concern, perhaps even more significant than Brexit itself.