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Brexit blog: Don’t look back in anger


June 2016 was a momentous month for the UK and for Europe. The vote "to Brexit" the EU has put a stake in the ground beyond which things will never be the same again. JLL's head of research for Europe, the Middle East and and Africa looks at why Brexit was a possibility sooner or later,  and why UK commercial real estate can continue to thrive in a post-Brexit era.


Fate and fortune

The decision the UK took not to join the euro in 1999 made the probability of a Brexit more likely, sooner or later. Some of the strains that led to the leave vote are, arguably, the direct result of the UK economy outperforming the Eurozone for much of the recent past. This has fuelled underlying suspicions about the EU and, in part, encouraged migration flows. The situation could not be sustained forever. ​

With the real prospect now of the UK leaving the EU, the latter can refocus on addressing the deep structural flaws within the Eurozone and move towards the closer political union that the euro needs in order to be successful. Though some may reject this idea and question what this means for Nordic and CEE non-euro members, like it or not, the absence of the UK is likely to be helpful in making progress here.

Post-Brexit, it is in the interests of both sides to maintain good relations with each other. Successful negotiations will mean the acceptance of differences and the avoidance of rows and bickering over petty politics.

 

Reflecting on Brexit: strong free markets prevail

As the old, but true, adage goes, markets don't like uncertainty. Neither do most people. The big questions on everyone's lips are when is the Government going to trigger Article 50, and how is the UK going to go about getting the right outcome for the nation – its people, businesses and economics – in a post-Brexit world.

 The UK's underlying economic fundamentals are solid, and we at JLL have been clear to point out that the catalyst for uncertainty post the EU Referendum has been political, rather than economic. There is no reason to draw parallels with the most recent global, economic downturn. We are in a much different place than we were back then. The UK and the global economy is much stronger than it was in 2008; it's far less leveraged now – household, corporate and sovereign debt is much lower – and there is plenty of equity around looking for a home.

Well before the 24th June we faced political uncertainty: What did the longer term future hold for the EU without reform and would we or wouldn't we vote to leave the EU? After the marginal vote to leave on Thursday 23th June (52% vs 48%) and the immediate aftermath, we faced two political uncertainties: what is the risk of contagion and who will navigate the renegotiation terms of Brexit with the EU?

One of these political uncertainties has reduced significantly; in fact, the appointment of a new Prime Minister in the UK has happened far more swiftly than anticipated. Whilst negotiations have not begun, a deal with the EU for the UK's exit will follow and Theresa May, untarnished by pre-Referendum posturing, is well positioned to take things forward. That leaves the second political uncertainty remaining; contagion and the future of the EU.

At present there are few signs of broader regional contagion and some suspect that the volatile aftermath of the Referendum may deter some Eurosceptics in the remaining 27 member states from lobbying for referendums in their own respective countries.  There is an argument that the remaining 27 have become closer. What the ultimate future holds for the EU will be debated as long as it exists; for now the uncertainty around its future remains as it was before the 23rd June 2016.

Survival of the fittest

Free markets work in that they die or survive and thrive. The UK economy has a history of thriving and will continue to do so. The Government and the Bank of England will use fiscal and monetary policy to stabilise the economy and to stimulate growth. In addition, a flexible currency will allow for re-pricing of UK assets. The downside of course is the risk of a devalued sterling impacting on the cost of imports and inflationary pressures, but there is considerable upside for a currency that responds dynamically.

Whilst we are likely to see some re-pricing of commercial real estate (CRE) in the UK, we are unlikely to see falls to the same extent as after previous economic shocks. UK economic and real estate fundamentals are robust, with occupational demand and market supply maintaining a relatively healthy relationship. The selling of some UK assets by the retail CRE funds may trigger some price corrections, but will also show the resilience of prime.

To investors from dollar-pegged markets, UK assets are already at a significant discount, irrespective of any other re-pricing. So, with some of the political uncertainty behind us and signs that a "business as usual" environment is emerging in the financial markets there is an argument that UK property is already looking very attractive to overseas investors. Those that are investing for longer term returns will look back at 2016 as a window of opportunity to access the market, purchasing prime assets at a discount on currency alone.

British Land, one of the UK's largest REITs, has just announced it has exchanged contracts on the sale of the recently refurbished Debenhams department store on Oxford Street, London, to an overseas investor for £400m. This is likely to be a signpost deal and the start of a number that will follow. It is not that we will avoid price corrections for UK CRE, but with some political uncertainty abating and a relatively robust underlying economy, the CRE market may hold firmer than perhaps some expected.