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From Brexit to Brexodus

brexodus-city-of-londonOn 24 June 2016, the world woke to the shock result of the United Kingdom’s Brexit referendum. Turnout was historically high, at 71.8%, and more than 30 million people voted. At 52% – 48% in favour of leaving the European Union, the Brexit majority is far too slim to create any long-lasting stability. A range of forecasts in the run-up to the referendum attempted to predict the fallout of a vote to eave the EU, although it is clear that many of the UK’s voters either did not listen, or did not believe, these warnings. Read on for the latest developments as Brexit becomes Brexodus, and enjoy our very own, personal predictions for post-Brexit real estate markets.

Brexit fallout

On 05.07.2016, Mark Carney, Governor of the Bank of England, said that the risks surrounding Brexit are now starting to crystallise. […] The UK has entered a period of uncertainty and significant economic adjustment. The efforts of the Bank of England will not be able fully and immediately to offset the market and economic volatility that can be expected while this adjustment proceeds.

Brexodus on the horizon?

This uncertainty has already sparked stock market volatility, triggered exchange rate corrections, hit oil prices and given gold a boost. The UK property markets, both residential and commercial, are set for an extremely rocky patch. The share prices of Britain’s biggest listed property companies have been among the hardest hit, the construction industry is in the doldrums and three of the UK’s biggest open-ended property funds have suspended investor redemptions, with more to follow. Until negotiations between the next British government and the EU get underway, nothing is certain. And even once negotiations begin, there will be an extended period of instability, uncertainty and anxiety as companies lead the Brexodus and leav the United Kingdom, joined by a parallel Brexodus of talented, skilled and highly-qualified workers, scientists and academics.

Predictions for the UK real estate market

  • More UK open-ended property funds will suspend investor withdrawals – property is not fungible and cannot be converted into cash as readily as other assets. Property funds only really have one option when faced by large numbers of investors wanting to get out: close the exit door. This will become a vicious circle as more and more investors look to make a quick exit, thereby forcing funds to lock them in.
  • Commercial property prices will drop – having risen by around 40% since the last financial crisis, the sector will take a substantial hit as transaction volumes slump, investment decisions are delayed or redirected, and the UK economy as a whole stutters.
  • Investors will continue to bail out of Britain’s building and property companies – we’ve already seen housebuilders such as Barratt, Taylor Wimpey and Berkeley Group bear the brunt of stock market heat as confidence in the sector has collapsed, and this is likely to continue for the foreseeable future.
  • Residential property prices will tumble – there have already been reports of buyers pulling out of transactions because they think prices will fall further. UK banks reported that their new mortgage business contracted in the months before the Brexit referendum and we expect this to be the case for some time to come. If unemployment rises and the housing market grinds to a halt, the problems will be serious and wide-ranging. We expect house prices to fall by an average of 5-8% over the next twelve months, with bigger falls in London’s prime market.

Predictions for Germany’s real estate market

  • Foreign investors will increase their German commercial property allocations – Germany’s commercial property market has benefited from inflows of overseas‘ capital for years and we fully expect this trend to accelerate. The market continues to offer relatively good value, the euro has also lost ground against other major currencies and Germany is still regarded as a stable, safe haven for investors.
  • Office markets in Germany’s major cities will be among the biggest winners – companies plan years ahead and many have already developed contingency plans to deal with the Brexit and potential loss of access to Europe’s single market. Citi Group, Goldman Sachs and JP Morgan have already signalled that they are seriously considering a move away from London. Companies simply cannot afford to risk waiting for negotiations between the EU and the British government to pan out in two or three years‘ time. These companies have a massive responsibility to protect shareholder value. We expect to see a number of large-scale relocations, not immediately, but within the next six to twelve months. The only question is how many of these companies will flock to Ireland or France, rather than Germany.
  • Condominium prices and rents in Germany’s metropolitan regions will continue to rise – as foreign investors redirect their capital, as major banks relocate and as the Brexodus brain-drain of highly-qualified workers picks up pace, pressure on Germany’s housing markets will increase. Condominium and house prices in Germany’s metropolitan centres will be driven higher as a result, with Frankfurt and Berlin, and their surrounding regions, benefiting most.

 

What do you think will happen now that the Brexit vote has been cast, the dust is starting to settle and positions are becoming clearer? Let us know in the comments below.
 

2 Comments

on From Brexit to Brexodus.
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