Just minutes after the referendum result was announced, the value of listed real estate companies on the London stock markets began to tumble. But while the immediate impact of the vote for the UK to leave the EU was clear, it is more difficult to assess potential consequences over the longer term.
Overall, it is likely that central London will be most affected as businesses in the financial services sector consider their position. It was recently reported in the press that around 10 million sq ft of office space in the finance sector is subject to a break clause or expiry by 2021. Some of this space must now be at risk.
In recent months some developers paused work on projects as they awaited the outcome of the referendum. With the country backing Brexit, it is likely that many developers across the country will relook at their pipelines of projects and make fresh assessments of viability.
The number of transactions in the real estate market was already falling in the lead up to the referendum. It was widely expected that, given the institutional appetite for UK real estate, demand would increase once the result was known. But the uncertainties caused by the shock vote to leave the EU will likely lead to a relative cooling of demand from institutions. This could give private investors an opportunity to buy good income-producing assets at a favourable price.
The reduction in the value of the sterling will no doubt have negative consequences for the sector. But some of the immediate downsides may, over time, be counterbalanced as a weaker pound could boost overseas investors’ interest in UK real estate.
Five months after the Brexit decision, listed real estate companies share prices have recovered though not to pre-Brexit levels. Still, positive sentiment toward real estate in general has returned, with investors focusing greater attention on the fundamentals of property investment; i.e., location, sub-type and quality of tenant. The central London office market remains a concern, but international investors are still buying, in part attracted by the discount arising from the depreciation of the pound.
Until we know what the path to Brexit will look like, the future of the real estate market will continue to be a little uncertain. However, there is no doubt that investing in property for the long term is still considered a positive thing given the alternatives.
For any advice on how Brexit will affect your business, please contact Howard Freedman.