Even before David Cameron’s manifesto pledge to hold a referendum on the UK’s membership of the EU became a reality, the number of conversations we had about the potential impact of Brexit on the property market had risen from a background hum to a steady noise. Now, with the referendum date known, we have brought together thoughts from our UK, US and APAC occupier and investor clients, to find out what to expect if the UK heads for the exit.
First and foremost, the majority – investor and occupier alike – don’t think that Brexit is going to happen, although some occupiers have said they are preparing contingency plans just in case. Finance occupiers appear to be most concerned, the retailers are still unsure, and tech companies are seemingly not bothered. The major London office employers we spoke to all said that if Britain votes to leave, they are unlikely to move their businesses from London.
However, some did speculate that their future head count growth may be stronger outside the UK than within, which has implications for office take-up over the medium to long term. There are also questions about the rationale for having your HQ in the UK if that was previously how you got your toehold in Europe. As a result, some corporates may eventually move their HQ functions to within the EU, as may some of the big non-British retailers.
But several major financial services businesses stated that even if they did want to relocate to Paris or Frankfurt there is neither the pool of staff nor suitable office space to make the move viable.
Investors we spoke to seem unconcerned. Their prevailing view is that they are buying property in the UK because of the quirks of UK leases and the performance of its assets. The UK’s position in Europe is not important. But several said that they would have to review the costs of hedging if a Brexit led to greater volatility of the pound.
Views are mixed on whether the leasing and investment markets might go quiet in the run-up to the referendum. There is as much evidence that we will see a pick-up in activity before the vote as a slowdown, but those in retail property are most concerned, given that their performance is linked to consumer confidence, which is more likely to take a hit. If we vote to leave, it is likely that transactional volumes will be lower than expected for the period of negotiation on our position within Europe, which could take a few years.
Over the longer term, some retailers said that an exit could be positive – their UK employment costs might fall as some of these are related to EU legislation. However, given the UK is already one of the cheapest locations in Europe for hiring and firing, this is unlikely to have a material effect. In the industrial market, investors are not concerned; while many industrial occupiers rely on a wide European supply chain, their investment in plant is significant enough to rule out any knee-jerk decisions on leaving the UK. However, if exporters’ costs rise as their products hit an EU border, there could be some departures to the Continent in the long term.
The overriding sentiment seems to be that most are fairly undaunted by the prospect of a Brexit, although there are likely to be a few blips in investment activity around the vote itself and, more longer term, around the negotiations that would follow a “no” vote.
Taking this into account, we remain of the view that the UK will still be among the world’s most popular destinations for cross-border investment in real estate, whatever the result of the referendum. In the leasing markets it is probably the City office sector that is most exposed if Britain does exit from the EU. However, the marked decline in the dependence of that market on banking and financial tenants in recent years will minimise the impact of any gentle decline in popularity that the City might experience.
Mat Oakley is head of commercial research, Savills
