Talk of a hard Brexit could only be in name

It has been assumed that the upcoming UK General Election will result in a larger majority for the Theresa May government, who will use it to pursue a soft Brexit. Across the developed world, voters have been routinely tripping up the opinion pollsters, and we will only truly find out the election outcome in the early hours of June 9.

Talk of a transitional deal, with EU regulation remaining in place, suggests the UK is heading towards a soft Brexit.

Growing awareness of the huge complications of untangling the UK and EU also raises the prospect that the final deal will itself be Brexit in name only.

There are many issues emerging as a result of the UK leaving the EU that will take years to settle, and in many cases the obvious settlement to reach is to preserve the status quo.

For instance, the majority of submarine telecom cables from Europe to North America run via the west of England; while 80 per cent of European currency trading takes place in London. There are UK manufacturers who source most of their component parts from the EU.

Both sides have compelling reasons not to rock the boat.

The UK Prime Minister’s letter invoking Article 50, suggests to the EU: “In order to avoid any cliff-edge as we move from our current relationship to our future partnership, people and businesses in both the UK and the EU would benefit from implementation periods to adjust in a smooth and orderly way to new arrangements”.

In short, both sides are already thinking of an interim deal that looks much like being in the EU, which kicks in once Britain leaves. Considered alongside the UK’s willingness to remain EU regulated, the continuation of the previous trade order after March 2019 could make Brexit a non-event.

Sales rebound

So what will this mean for commercial property? According to Property Data, office investment sales in the third quarter of 2016 slumped to £3.1 billion (Dh14.7 billion) in the aftermath of the referendum. In the fourth quarter of 2016, sales rebounded to £4.6 billion, then increased to £5.7 billion in the first quarter of 2017.

Even during the period when government ministers were making hard Brexit speeches, investors were returning to the market.

However, the rebound also owes much to a new atmosphere among investors, which is well illustrated by the “Trump trade” in the US, where markets have decided to ignore the political noise and focus on economic fundamentals. Like the US, the UK economy has made huge strides towards normalisation. Were it not for Brexit, the Bank of England would probably be matching the US Fed with rate rises.

For UK commercial property, particularly in markets favoured by foreign investors, we are already seeing an equivalent of the Trump trade. Buyers are focusing on long-term prospects, not the short-term politics. Evidence we are moving down the road of soft Brexit will spur this trade.

The writer is Chief Economist at Knight Frank.