The future of commercial property following the referendum result25 Jul 2016
An underlying uncertainty should not alter the UK’s position as an attractive market for commercial property, says Steve Eccleston, Kuits’ managing partner. In an interview with Lexis Nexis’s Julian Sayarer, Steve assesses the fallout from the EU referendum result, anticipating changes to the business models at many law firms, with some effects likely to bring good news for clients.
How will Brexit impact on the commercial property sector – both in the short and long-term?
We are currently in a period of uncertainty, which is likely to lead to illiquidity in the market, and probably in the finance markets, in the short-term. This is likely to lead to reduced pricing and a lower deal flow. Indeed, we already know of a number of significant transactions that have ‘fallen over’.
On the positive side, the likelihood of an extended period of extremely low borrowing costs, together with the lack of suitable alternative investment opportunities, means that property is likely to remain an attractive investment for many and the uncertainty may well create buying opportunities for the well-funded investor. The fall in the value of sterling also makes UK property more affordable for many overseas investors, who are becoming increasingly active in centres outside of London, such as Manchester and Birmingham (these areas are often seen as less exposed to European markets than London and the South East).
I would foresee a reduction in occupier demand, particularly in Central London. International banks and financial institutions currently using the ‘passporting’ system to operate across the EU from a London base may move to the continental mainland, which may impact upon rental levels and, ultimately, on values.
An extended reduction in the value of sterling is likely to have a negative effect on GDP also impacting upon rental levels and value. This effect is likely to be pronounced in the retail sector, which is already suffering from the pressures arising from the growth of internet options and changes in consumer habits, and in the leisure sector which is vulnerable to changes in levels of discretionary spend.
The underlying market is viewed as the most sound and liquid in Europe. Demand has exceeded supply in many key areas and, while this gap can be expected to narrow – assuming there is no significant failure in the economy – it has some way to disappear. Furthermore, the global search for yield will continue to make property attractive, particularly in what remains (despite the continuing political and economic uncertainty) a relatively transparent, liquid and stable market in what is seen as a fundamentally strong economy.
While there is talk of concerns of a drop in foreign investment in the UK commercial property market, over the medium to long-term it should continue to be an attractive place to invest. However, this will be dependent upon the country’s ability to deal with the shock – both economic and political – brought about by the Brexit vote and the speed with which a negotiation of the UK’s future relationship with Europe is concluded.
Will there be any impact on property law affecting these sectors in the UK – again in the short and long term?
The Brexit vote will have no immediate effect on property law which is largely UK specific and considerably more advanced than elsewhere in Europe.
How will this impact upon UK lawyers and their clients?
As there are unlikely to be significant changes in the law, this is unlikely to impact upon either lawyers or their clients – however, changes in the market may significantly impact upon the position of lawyers.
There are a large number of property lawyers in the UK, many of whom, following changes brought about by the pressures of the financial crisis and continued regulatory pressure, continue to service their clients in a very similar way to that adopted ten, 20 or even 30 years ago. The immediate impact of a reduced deal flow is likely to be a reduction in pricing, as firms compete on price to maintain their share in a shrinking market. These price reductions may then force firms to adapt to more efficient market-facing behaviours to maintain profitability. As a result, the outcome should be a positive one for clients in that, ultimately, they should receive better service at a lower price.
Lawyers may see things less positively – they will have to change, there will be fewer of them and they will be operating in a more competitive environment.
This article first appeared in LexisNexis and has been reproduced here with kind permission from the publisher. You can see it online at LexisNexis.com here.
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