UK realty market is primed for any possibility

The UK is less than two weeks away from voting on whether to leave the European Union... and currently the opinion polls point to a tight race.

However, in the UK, political pollsters have a disappointing track record. For instance, in the 2014 General Election, the opinion polls suggested no party would win overall control of Parliament, when in fact Prime Minister David Cameron’s Conservative Party won an outright majority.

For this reason, property investors in the UK need to be ready for both scenarios: a vote to remain in the EU or a vote to leave.

The consequences of a vote to remain are the more predictable, as we have a good precedent to guide us. In September 2014, Scotland held a referendum on whether to leave the UK, and during the campaigning period, activity in the real estate market dropped off markedly.

This has also been the case during the campaign for the EU referendum, and today it is common for those negotiating property deals to use delaying tactics to push back the signing of contracts until after the result.

When it was announced that voters in the Scottish referendum had favoured the status quo option of remaining in the UK, property investors entered the market quickly. In the four months prior to the referendum, the Scottish commercial property market saw deals totalling £ 664 million. In the four months after the poll there was £1.6 billion worth of purchases — a more than doubling of demand.

Since the referendum date was announced I have briefed as many investors on property in the UK, and London in particular, as before. Most are interesting in the potential to make opportunistic investments, either riding a market rebound in the event of a vote to remain in the EU, or taking advantage of the fall in the value of the British pound if there is a vote to leave.

Given the above, I would certainly expect a vote to remain in the EU to lead to a relief rally for UK property, with London as the focus, due to its strong attraction to international investors. In the London commercial property market, yields could harden.

Also, the UK will have ended the political risk surrounding the referendum, but at a time when there are upcoming elections in the US, France and Germany. Consequently, the UK could gain from the political uncertainty in these other G7 economies, and draw more foreign investment as a result.

The effect of a vote to leave is far more difficult to gauge. It would probably be greeted by volatility in the financial markets, both in the UK and abroad. The pound would devalue, the Bank of England may have to release more QE money to support the economy, and inflationary pressures would build.

Currency advantage

Also, the devaluation of British pound will turn to the advantage of the property market. As the pound becomes weaker, UK property will appear more attractively priced to foreign investors. As discussed above, I have encountered a great many overseas investors who have been preparing for this very scenario, with a view to making opportunistic purchases after the referendum.

Consequently, the aftermath of a vote to leave will in my opinion result in a fast paced mini-cycle. An initial flush through of a relatively small number of panic or forced sales will quickly be counter-balanced by a new wave of currency-driven buyers who are looking to invest in London’s long-term economic prospects.

In the last five years, the largest source of demand for leasing office space in London has been from technology, media and telecoms (or TMT sector). Firms like Amazon, Google, Linkedin and Twitter have gone from having little or no presence in the city to occupying large HQs. Firms like this are in London for its large pool of talented, highly-educated workers.

They are not in London for its EU membership, and this economic demand driven by the technology revolution show that the referendum result will not change the long-term outlook for the city.

Property investors should take note.

— The writer is Chief Economist at Knight Frank’s London office.