The infographic below (please click to enlarge) shows that ‘Brexit’s impact on the domestic market’ ranks as the top project risk among real estate investors, developers and asset managers – with a substantial 50% of investors concerned about how an out vote could impact their domestic projects.
Ahead of the referendum vote on Thursday, two BLP lawyers examine what a Brexit would mean for investors and developers when it comes to their UK real estate projects…
The short, medium and long term impact on investment – Matthew Peel, Partner, Commercial Real Estate
Last week the polls indicated a marked swing towards a vote for Brexit. This put the brakes on the slight uptick in investment activity that had started to appear earlier in June when the remain vote was the more likely outcome.
If a leave vote does turn out to be the result then, in the short term, we are likely to see Sterling significantly lose value against other currencies which overseas investors may seek to exploit. A measure of nervousness is also likely as investors await the new reality. Inevitably, a prolonged period of uncertainty and market volatility in all sectors will no doubt have an impact on investment volumes.
In the medium to long term, will we see the UK cease to be the primary choice for property investment in Europe? You would expect not as the UK’s attractions for commercial investors will remain unchanged. Much will depend on how difficult trading across borders becomes in the post-EU world and the availability and cost of debt funding.
More broadly, changes to freedom of movement and restrictions on migrant workers coming to the UK could potentially affect the cost of construction. The occupier market may be adversely affected by restrictions on the movement of goods and services, leading to a reduction both in demand and uptake of space.
Consequences for the UK’s construction industry – Adriano Amorese, Partner, Non-Contentious Construction
People and things
The UK construction industry is heavily reliant on migrant workers from within the EU. The last recession left a considerable skills gap and a large proportion of the domestic workforce will soon be collecting their pensions. If the UK votes to leave the EU, but retains the free movement of workers, the impact on labour is likely to be negligible. However, this does seem an unlikely outcome given that immigration has been a central platform for the “leave” campaign. Even if the UK no longer allows the free movement of workers, access could still be granted to skilled workers but this is likely to be administratively burdensome and, potentially, cost-prohibitive. Brexiteers will argue that this represents an opportunity to develop a domestic workforce of skilled construction workers. However, unemployment is currently fairly low and training takes time, so this does not really offer a short term solution to the issue. What will the industry do in the meantime?
The UK construction industry uses mainly domestic products, but the high-end of the market has become reliant upon imported products from within the EU (e.g. specialist curtain walling systems from Germany and Italy and the like). Again, the impact of a leave vote will depend on the terms of our continuing relationship with the EU, which as a matter of economic necessity is likely to include the free movement of goods. However, some commentators fear that this would require compliance with trade rules that could drive up costs.
Brexiteers operating within the UK construction industry will complain that the industry is mired in burdensome EU regulations and directives that lead to inefficiencies and delays. However, this will not end with a “leave” vote. The regulations and directives most often complained about (e.g. those relating to health and safety, product standards, public procurement and the like) are already enshrined in statute and will not be repealed without being replaced. If the UK wishes to continue doing business with the EU post-Brexit, which as a matter of economic necessity it will, it must preserve a regulatory environment that facilitates this. A leave vote is unlikely therefore to lead to an appreciable reduction in the red tape that many detractors associate with EU membership.
It is trite to say, but the fortunes of the UK construction industry are inextricably linked to those of the wider economy, and in particular the commercial and residential property markets. The biggest impact of a leave vote on the UK construction industry will be the inevitable slowdown in activity whilst the UK transitions and investors weigh up their options. No one can predict how long or how deep this slowdown will be or whether the UK construction industry is in sufficiently rude health to weather-the-storm. Some commentators will argue that Brexit is a mere fig leaf covering the cyclical nature of the UK property market, which would have peaked and cooled quite independently of the Referendum. The silver lining for those procuring and funding projects will be that good contractors will be forced to compete for work again, which should lead them to be less risk averse and pricing jobs more keenly. However, this should be viewed as a pyrrhic victory if the wider economy goes into freefall!