As we all collectively woke up to the surprise EU Referendum result that the polls had yet again got wrong and even the bookies failed to predict, we thought it was appropriate to seek out the views of young surveyors, graduates and students on the first question on every client’s lips “What happens now?”. After all, our generation will live our full adult lives with this decision and it will shape our market for years to come.
So what have we just left?
The European Union is an economic-political union of 28 member states, consisting of 508 million people that are located primarily in Europe. You may be surprised to know that the UK was not an original founding member, and actually joined in 1973 (so we have survived, travelled and lived in Europe pre-EU). Anyway enough of the history and on to the nitty-gritty.
By voting out we have given up our seat at the table where all the EU legislation and agreements are created. We have also left a free single trading market which supported 3 million jobs and contributed £78 billion to our economy every year. To make matters worse, the uncertainty caused by Brexit is expected to continue for circa 2 years as we negotiate our exit and start to build trading relationships around the world. This has arguably weakened our stature internationally and pre-vote President Obama stated that we would be ‘at the back of the line’ in agreeing a new trade deal should we opt to leave. However, today he warned against Brexit hysteria as he moved in to commence that US-UK trade deal! This stance was backed up by Japan’s Prime Minister Shinzo Abe who stated that the Brexit reaction to stocks and currency has been overblown. Indeed today (28th June 2016) both the FTSE and pound bounced back following two days of turmoil.
So pre-vote the big question was what does an EU exit mean for our clients? Does Armageddon ensue? Does money dry up? Or will investors view a prime physical asset, such as property, a viable and logical investment in a time where the more liquid equities and currency markets are likely to experience immediate volatility? Essentially, businesses were largely in line to remain – stemming in part from the age old adage ‘if it ain’t broke, don’t fix it’. Markets don’t like uncertainty, it slows down investment and creates doubts, hence in Q1 2016 investment volumes for real estate were down 21%. However, some may argue that investment volumes were always going to decline after the market reached its peak towards the latter stages of 2015. It is certainly fair to say that the EU question has had an effect on investment volumes, however, the bigger question is to what extent has it effected the market when compared to other macro-economic factors?
This all sounds like bad news to me, however I recently attended a debate at which Andrea Leadson MP made a very compelling economic/business case for leaving – which gave me hope! The UK is the world’s 5th largest economy by GDP, the 8th largest manufacturer in the world, the world’s most transparent market, financial capital of the world, has 3 of the top 10 universities in the world (the rest of the EU has none), the business language of the world and 83% of the world’s economy is outside of the EU. Why would companies leave a country that has served them so well and which has the infrastructure, services, and political stability (sort of) to support them? Indeed, America, Germany and Canada have all stated an intention to create new trade deals within days of the out vote. Furthermore, the FTSE 100 closed at 6021 on Friday the 17th (week before referendum), it now stands at 6,140.
click for latest figures
Despite this optimism, we should not forget that these are early days and things can change very quickly. It is now imperative that we all track the market closely, with deals completed post Brexit becoming invaluable evidence in providing a true understanding of where the market and investor sentiment lies. We must now hope that with the pound weakened, foreign investors will identify UK real estate as the bargain bucket it currently is and will feast on it over the summer! Indeed demand for prime property is driven by a number of factors such as the extent of business clusters, language, skills, education and lifestyle. Much of these remain in stable isolation of our decision to leave the EU and we see no obvious alternative factors drawing investors. So despite short-term nervousness, our economy and nation has a lot of positives that we can take comfort in.
So what exactly does this ‘brave new world’ hold for our industry?
Over the last few days we have all had a chance to reflect on the result and what it means for our industry. Only last week the house price index showed asking prices rising, reaching yet another record high everywhere but London. For those of us trying to get on the property ladder down here maybe that’s no bad thing however it’s undoubtedly devastating if you have just taken the plunge and find yourself potentially exposed to falling LTVs and rising interest rates. The Bank of England needs to clarify the support it will implement to ensure the stability of house prices in maintaining consumer confidence.
Whilst the FTSE 100 has held up relatively well in the aftermath of the EU referendum, there have been some high profile casualties, mainly from the banking, housebuilding, and airline sector.
The biggest fallers on the FTSE 100 (Monday 27th June 2016, 15:30) – click to enlarge
Indeed some stocks were suspended from trading amidst the initial turmoil.
This immediate effect on housebuilders was not unexpected as we said markets do tend to panic when faced with uncertainty, however a drop such as the 75% Redrow momentarily experienced left the industry reeling before it bounced back to a 20% fall. Indeed today it announced that it predicted profits to exceed estimates!
The actual impact of the vote to leave will play out over the coming months or even years. However, Zoopla has predicted house prices falls of as much as 20%. This drop would see house prices returning to 2011 levels and whilst the impact of that on pensions is unlikely to become apparent immediately there is good reason to predict that there are likely to be synergic falls as a result of depressed investment in our housebuilding companies such as Barratts, Persimmons and Taylor Wimpey – all of whom pay big dividends.
So where does that leave us?
Sadly my crystal ball is failing me at the moment but the falls seen in the immediate aftermath of the EU referendum result appear to be exaggerated as a result of the uncertainty we face, partly fuelled by the lack of clarity offered on our exit plans. Despite all the gloom the UK still has a significant shortage of homes and most UK housebuilders have a strategy to address the supply. This means the shock to the market may be temporary – although any growth in market capitalisation may be overly optimistic! In addition, house sales and prices will take a hit with modest estimates of at least 5% but hopefully not as extreme as the Zoopla 20%.
For the UK commercial property market there is no doubt that uncertainty is stifling business and J.P. Morgan have already threatened to relocate employees from the UK. We need clarity on what trade agreements we are going to seek with the EU and the Government needs to work hard to maintained confidence in the UK’s investment status to investors. However, in the long term businesses have a great ability to adapt and the freedom of being released from the EU may in the long term play to their advantage.
Finally the rural sector is quite rightly seeking urgent clarification on the timeline it faces to open international trading agreements and information on the alternative support and funding farming will now receive.
So what are the immediate concerns?
· The future of planned infrastructure – what will happen to HS2, HS3 and the number of other planned large scale projects. Again we don’t have a crystal ball but a delay in proceedings would not be too surprising. The Government needs to offer clarity and invest in the UK’s infrastructure, these projects will then in turn create opportunities for housebuilders.
· Investment status – some projects are only viable under a certain market conditions. There is therefore a risk that we will see schemes being scaled back or even cancelled. Those purely reliant on development schemes or with portfolios in the financial sector are likely to suffer thus promoting the case for diversify your risks. However, those with financial stability will prosper.
· Skills shortage – immigration was a key factor in the EU campaign but the industry (particularly the construction and rural sector) relies heavily on European workers. This workforce is not likely to disappear overnight but it is now crystal clear that we need to reenergise investment in a future UK workforce whilst looking at potential EU deals that would still allow this workforce to be used.
One thing is certain: nobody can tell us with any certainty what will happen, but change creates opportunity and those who have planned and created a strategy to deal with the situation we are facing, will be able to gain the advantage. There is also no doubt there was a huge divide between the London, Scotland and parts of Ireland vote versus the rest of the UK and that many UK citizens are feeling disenfranchised.
Whilst the industry may feel bruised and battered by the outcome that many campaigned against, we now need to come together to reunite this great nation by providing the stability that the markets need. This includes making sure the economy is truly inclusive and one from which the whole of the UK benefits.
Let me know your thoughts below.