In the aftermath of the referendum vote, the UK real estate industry faces new risks and challenges that will need to be addressed. The UK has voted to leave the EU and clients and their advisers must accept the result and identify the risks and opportunities that lie ahead, both in the near term and once Brexit has taken effect. After such a seismic event, uncertainty has proved to be the only certainty.
From the real estate perspective, the purely legal implications are of significantly less importance than the effect on market conditions. Perhaps the biggest concern is whether the UK (and London in particular) will continue to attract inward investment and retain its appeal as a country in which to do business and where people from around the world want to live. This in part will depend on the extent to which the UK’s status is seen as dependent on its connection to the EU. Taking a more global view, it can be argued that the UK’s position is such that membership of the EU has limited relevance and that London will remain a true global city irrespective of Brexit.
I Time frame
The new Prime Minister has promised to trigger Article 50 of the Lisbon Treaty by the end of March 2017 and the UK looks set to leave the EU by the summer of 2019. The Prime Minister has also announced that a Great Repeal Act will be used to remove the European Communities Act 1972 from the statute book and enshrine all existing EU law into British law. New legislation will be required to make any changes necessary to ensure that the adopted law continues to work and meets the UK’s specific requirements. Brexit gives the UK the opportunity to choose those aspects of EU law that work while modifying or repealing those that do not. The process of modifying existing EU law will continue for a number of years as domestic law establishes its independence. The possibility of a further Scottish independence referendum and the risk of contagion arising among the remaining EU Member States are factors with the potential to complicate the process further and extend the expected timing.
II Risks and opportunities
The uncertainty surrounding Brexit needs to be considered in the light of continuing international economic and political uncertainty. Overseas investors will continue to look for attractive assets and income streams. Brexit notwithstanding, UK real estate has retained its appeal as a safe haven where businesses, individuals and funds can store, protect and grow their wealth. Indeed, there are a number of factors that have combined to make UK real estate an excellent investment opportunity. Perhaps of most significance is the current weakness of the pound. Sterling has plunged to a 30-year low following the vote and the exchange rate remains very favourable to overseas buyers. The Bank of England has cut interest rates to a record low of 0.25 per cent and, although another cut remains a possibility, inflation is expected to rise. A new prime minister has afforded stability, unemployment remains low and there has been a slew of other better-than-expected economic data. In addition, a number of trophy assets have come to the market at a discount and the ‘super prime’ market in the residential sector has recorded significant price reductions due to falling volumes, creating a buying opportunity. These and other factors mean that the UK has become a slightly more affordable global property hotspot.
However, Brexit remains at an early stage and uncertainty will continue as the UK proceeds with the extraction process. Negotiations with the EU and global trading partners are likely to be complicated and protracted, with the remaining EU members being very wary of being seen to give the UK a ‘soft’ deal. Concerns remain that businesses may seek to relocate or downsize their UK operations and this is tied to fears about tighter controls on the free movement of people. In addition to the effects on businesses generally, restrictions on immigration will be a particular problem for the construction industry, which is heavily reliant on the EU for skilled and non-skilled labour. In summary, the UK real estate market has held up better than many in the industry expected, but there will undoubtedly continue to be bumps and corresponding opportunities along the way as Brexit becomes a reality.
III Legal implications
As already mentioned, land law in the UK (or rather the three separate systems of land law within it) has remained almost entirely unaffected by the UK’s membership of the EU. Brexit does not have any direct legal implications for the way in which you hold and deal with UK land. Overseas investors continue to be able to own, sell and lease UK real estate without any legal restrictions, and registration at the Land Registry affords secure title backed by a state guarantee. The impact on inward investment is more dependent on the wider economic and political considerations that come with UK independence and the form that ultimately takes. That is not to say that Brexit will not have an impact on real estate transactions – clearly, the market is driven by the need for occupiers and Brexit is going to have some impact over where businesses choose to locate. We have already seen the use of ‘Brexit clauses’ leading up to the vote and property documentation will continue to reflect the ongoing uncertainty while the model and timetable for the UK’s exit are determined. The trend towards shorter, more flexible leases will continue as occupiers monitor the position and weigh up their options. Break clauses, alienation provisions and rental structures will be a particular focus, both for new deals and for the regearing of existing leases.
The position in relation to environmental and climate change law is very different. EU legislation governs the vast majority of the UK’s environmental and climate change law and policy. This in turn affects the environmental aspects of the planning process. State aid and procurement and the Alternative Investment Fund Managers Directive are also governed by EU regulations. Brexit will have significant and direct implications in all these areas, although our expectation is that much of the environmental legislation is here to stay. Investors in infrastructure and energy will also be aware of the effect of Brexit, while the mining and minerals market will be less affected.
Although it is impossible to predict the future, the outlook for UK real estate is more positive than had been feared, and there is some cautious optimism for the Brexit negotiations. For example, those real estate funds that closed post-Brexit have largely reopened for business as the initial shock has subsided. Real estate practitioners can help their clients to develop an appropriate post-referendum strategy to ensure that risks are assessed and monitored and opportunities are taken.
To many market participants in the residential sector, the recent changes to SDLT have had a far greater damaging effect on investment in housing than Brexit, and the UK government’s attitude to continued overseas investment in the housing sector (particularly in London) will be fascinating to watch.
To achieve some perspective on the inevitable uncertainty, it is important to see Brexit in a global context. Concerns about Chinese and other emerging market economies, the outcome of the US election, historically low oil prices, instability in the Middle East and continuing worries about the eurozone and its forthcoming elections all mean that UK real estate will retain its appeal for overseas investors. However, there is no room for complacency and it is clear that the UK must work hard to ensure that it remains attractive to investors and continues to play a key role in the global real estate market.
1 John Nevin is a partner at Slaughter and May.