London Property House Prices

What Does Brexit Mean for the Northern Property Market?

Harry Dhaliwal, of property provider Belvoir, gives his thoughts on what they Brexit means for UK property.

In preparation for the poll on Britain’s EU membership status scheduled for June 23rd this year, the property industry is suggesting that withdrawal could have a devastating effect on the UK market. The predicted level of this risk varies from region to region and from company to company, yet most are agreed that there will be some negative impact on the UK property market should Britain vote ‘yes’ to Brexit.

At present there is no definitive study of the economic impact of Britain’s current membership of the EU or of the benefits and costs of withdrawal. Property experts, however, remain mostly convinced that, certainly in London and perhaps in other areas of the UK, the domestic and commercial property markets need to prepare to take a big hit should Britain leave the EU.

A Vote for Uncertainty

At the recent Movers & Shakers property breakfast in London, three of the largest property companies in the UK each warned of risks to the economy of the UK should Britain decide to leave the EU. Chief Executive of Land Securities, Rob Noel stated that the forthcoming referendum would at the very least create nervousness and uncertainty within the commercial markets and that a vote to withdraw was a vote for an uncertain future.

Currently two-thirds of all UK property professionals want Britain to retain its place in the EU. Both Chris Grigg of British Land Chief and Peter Vernon of Grosvenor were in strong agreement with Noel. Grigg pointed out that businesses like certainty more than anything and a vote to leave would upset any certainty, while Vernon pointed out that with the information currently available, those voting ‘out’ do not yet really know what they are voting for. This uncertainty is likely to have an impact on many UK industries with the property market likely to see at least temporary upset in terms of sales due to a lack of clarity in the build-up to the referendum.

The Domestic Property North / South Divide

There are huge differences to the potential impact of withdrawal from the EU in terms of property sales in the UK. In areas such as Manchester or Leeds, where the property market is driven mainly by domestic owner-occupiers, the risks are minimal. It seems clear that while the effect can only really be measured once Brexit becomes a reality, the North is well positioned to avoid bearing the brunt of any economic repercussions. Stronger cities and larger conurbations should be more resilient; Manchester, for example, has many other drivers such as the universities, Northern Powerhouse proposal and other initiatives which are contributing to its growth as the fastest growing city in the United Kingdom.

The London residential property market has long been seen as a safe haven for overseas investors and therefore an ‘out’ vote could have a massive impact. Currently at the top end of the London property market almost half (49%) of investors are from overseas and 15% of prime central London property is owned by Europeans. As the value of the sterling continues to drop in light of the uncertain future, these once ‘safe’ investments will be seen as increasingly risky. Yet while Northern cities are becoming more reliant on foreign investment – from individual investors, to institutional and sovereignty wealth investors – these investments are typically non-European. London has saturated the market from £1m- £3m individual investors in the Chinese and Middle Eastern basin specific markets and so Northern markets have seen an impressive upswing. The institutional sovereignty wealth investors are getting nearly double the yields they can get in London, and not the reverse in capital values that has happened in some areas of London where over investment has happened.

Warnings from the International Monetary Fund

The International Monetary Fund (IMF) has warned that the twin prongs of the upcoming referendum and soaring house prices are threatening the ability of Britain to complete a successful economic recovery. Managing Director of the IMF Christine Lagarde commented that a vote for Britain to leave the EU would leave “no winners” and that the negative effects of the impending vote were already being felt. In many areas of the UK growth in house prices is already fast outpacing growth in wages, leaving many families with no choice but to shoulder more debt. These high levels of homeowner debt and rapid growth in house prices combine with weak productivity and the uncertainty caused by the looming referendum as the top three biggest risks to the UK economy at present.

Freedom from Regulation?

Many of those campaigning for Brexit are doing so under the impression that leaving the EU will result in more freedom from regulation. What should be considered is that ironically, in terms of the housing market, Brexit could actually result in increasingly heavy-handed regulation as is the case with Hungary’s Land Act. Should Westminster attempt to restrict the rights of EU nationals in terms of investing in or purchasing UK property, they would likely meet a wall of resistance. George Osborne has changed stamp duty to favour owner-occupiers already, but Brexit could well put pressure on to introduce laws that place limits on foreign investors in property in London.

The fact remains that any departure that may happen from the EU will not happen overnight even in the case of a strong ‘out’ vote. There are a variety of possible outcomes and models throughout Europe and it remains uncertain which path Britain will take. There will be a negotiation period of at least two years, during which time the current levels of uncertainty within the property market are unlikely to be resolved. Whether the UK’s ‘safe haven’ status will be impacted remains to be seen.