Brexit

It’s been interesting to see the apparent pause in real estate investment as institutions await the outcome of the Brexit referendum. According to the FT, the flow of capital into central London offices dropped by half between the final quarter of 2015 and the first quarter of 2016.  How much of this is due to normal seasonality (the final quarter tends to be the busiest anyway) and other capital market issues (Euro Stoxx is down over 13% in the last six months), it’s hard to tell.  Some investors apparently see the Brexit-induced market hiatus as a chance to get access to stock that is normally not available.

What will happen if the UK votes to leave in June? I tend to go with William Goldman’s attitude here that “Nobody knows anything”.  Who would have predicted a Labour wipeout in Scotland?  I should know better…but sticking my neck out.

Not much immediately. We’ve seen lots of expected major events when the sky didn’t fall in e.g. Y2K.  The dot.com bust actually resulted in a shift of capital to real estate as equity prices collapsed.  Like the introduction of the euro, the long term, dynamic effects of Brexit are likely to be, er, long term.  It’s taken a long time for the effects of the Euro to unfold (as they still are) and, even then, it’s difficult to know what would have happened to Greece, Spain and Ireland had they not been in the Eurozone at the time of the GFC.

The long term effects of Brexit are likely to be negative. Apart from some reduced contributions (which have major multiplier effects in poorer EU regions), I haven’t heard  a convincing single economic benefit of Brexit.  It’s hard to see EU members not imposing some pain on the UK pour encourager les autres. However, what will happen about Scotland, the new relationship with the EU, the effect on the stability of the EU itself etc. will take quite a long time to emerge.  

In the short term, it’s the political risk that seems the greatest to me. If Brexit results in the fall of Cambourne and a new governing party dominated by people like Boris Johnson, Priti Patel, John Redwood etc., I suspect that the quality of governance of the UK will suffer a lot.  I’m not a great fan of the current regime where policy making seems excessively improvised but they seem like responsible adults in contrast to the Brexiteers.

In the short-term, there does seem to be a ‘wait and see’ going on. It’s the secondary risks to the current government that seem to be key.  The longer term negative effects on the broader economy and London as a global financial centre are real – but long term, very uncertain, difficult to isolate and with often complex transmission to real estate markets.

 

 

 

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