Brexit and the Property Market – Is it Time to Panic?
Published: 9 June 2016
The date has been set, the ‘yes’ and ‘no’ campaigns have drawn up the battle lines and on 23 June Britain will decide if it will stay in the EU.
Speculation about a possible Brexit and how it will affect the UK economy is now reaching fever pitch with only one consensus – uncertainty. No one knows for sure how a Brexit would affect the UK economy and that uncertainty is beginning to affect the property market. But the big question for those within the property market is, how long will this uncertainty last and how will it affect the UK property market?
The current situation
When it comes to markets the only certainty is that they do not like uncertainty. The prospect of a Brexit is already affecting the value of sterling with the pound hitting its lowest point against the USD since 2008 earlier this year. From a real estate perspective this is a cause for concern. Savills, the estate agency, warned that the UK residential and commercial investment markets were ‘subdued’ in the run up the to the referendum which is, perhaps, unsurprising as traditionally elections seem to have a stultifying effect on the property market. However, this time the concern is running deeper as Samy Char (chief economist at Lombard Ofier) told investors they “should avoid anything that relies heavily on foreign investor demand – like prime London property. Avoid UK banks and keep a low exposure to sterling.” But is the situation all doom and gloom or is it just scare mongering?
If UK remains in the EU
If the UK votes to stay in the EU then it is likely that the status quo would be re-established fairly quickly. After all the Scottish property market swiftly returned to ‘normal’ after the pre-Scottish referendum turmoil. Of deeper concern is what could happen if the UK votes to leave the EU on 23 June.
As Richard Donnell (director of research at Hometrack) said “If we vote to leave, I don’t think anyone has worked out what that means, other than more uncertainty”. There does, however, seem to be a general consensus that the domestic market is unlikely to be badly affected by a Brexit. Within the domestic market there is a supply and demand problem at the moment and that is not going to change soon regardless of a Brexit. There is also the fact that house prices are connected, and informed by, people’s incomes and this is unlikely to change significantly if the UK were to leave the EU. The only significant risk to the domestic property market, therefore, is likely to come from an increase in interest rates.
The prime London property market, however, is at far more risk. High end property in London is seen as a safe haven asset by many foreign investors and as Frank Knights’ recent data shows, 49% of investors in central London property are non-British citizens. According to Savills, EU citizens make up around 15% of the prime London market and with a Brexit they could withdraw their investments in London and look for investment opportunities within the EU instead. For the other foreign investors faced with the falling pound and the uncertainty in the market, one of two things could happen. Firstly, those who have already invested in the London property market could sell up instead of watching their property values fall. Secondly, (and conversely) after the initial shock of falling property prices, investors could start to pour into the capital looking to take advantage of the lower property prices, something we have already seen happen during the financial crisis.
There is also the argument that access to the single market has not, historically, been one of the attractions of the London property market so why should it become a problem now? Investors from Russia (who make up 9% of the market) and the Middle East (who make up 7.5% of the market) look to London for political and economic stability and a legal system that isn’t corrupt - none of which would be threatened by the UK exiting the EU.
Where a Brexit could hit the UK property market hardest is in the construction industry, the one sector where the ability to control UK borders and cap EU immigration into the UK is definitely not welcome. The construction industry is still suffering from a skills shortage due to the recession and according to Tony Pidgley (chairman of Berkley Group) over half of their subcontractors come from Eastern Europe so a Brexit could create a serious slow-down in the construction of properties across the UK and could adversely affect the market for a long time.
When it comes to the question of Brexit’s impact on the UK property market therefore there are a lot of ‘ifs’ and ‘maybes’. The only certainty seems to be that there will be some kind of effect on the property market although no one seems sure what that effect will be or how long it will last and whilst no one likes uncertainty it would appear that this time it’s going to be a case of ‘wait and see’.