Capital Language Solutions | What price Brexit?

What price Brexit?

BrexitThe focus of this blog is normally on Real Estate, which is admittedly a fairly broad focus ranging from different real estate asset classes to examining market trends, from legislative changes to social and economic developments. For this post though, we’re going to take a bit of an excursion and explore a more political topic: Brexit. As with any major political issue, the ramifications of the UK population potentially voting to leave the European Union in their referendum on June 23 will be long-lasting and not just confined to the political sphere. Read on to find out more about Brexit and what it may mean for the UK, Germany and the real estate markets.

Brexit: Europe’s economic ties with Britain

The United Kingdom is the second largest net contributor of funds to the EU in absolute terms (behind Germany) and fourth highest contributor as a percentage of Gross National Income (behind Sweden, Denmark and Germany). The UK’s contribution is equivalent to just under 6% of the EU’s expenditure, so there will be a considerable shortfall to make up for if the UK does leave, either by reducing spending or raising other member states‘ contributions. Of course, the UK leaving the EU doesn’t mean that it will stop contributing, but much depends on the negotiations that would follow a leave vote.
In 2014, the EU accounted for 44.6% of UK exports of goods and services (down from 54.8% in 1999), and 53.2% of UK imports of goods and services. The trend over the last few years has seen the UK’s exports to non-EU countries increase at a faster rate (6.5% p.a. between 1999 and 2014) than its exports to EU countries (3.6% p.a. over the same period). So, putting it in basic terms, EU countries buy just under 50% of the UK’s exported goods and services, and just over 50% of the UK’s imported goods and services originate in the EU. Whatever the eventual relationship negotiated between the UK and the EU in the event of a formal withdrawal from the EU, and any bilateral trade agreements the UK is able to agree with other trading partners, it is clear that Brexit would have major implications for economies on both sides of the English Channel (and across the Atlantic).

Brexit: Germany’s economic ties with Britain

40% of German investment in the UK is in the transportation and storage/logistics sectors, accounting for 58% of total EU investment in these sectors in 2013. The UK is BMW’s fourth biggest market and the company has more than €1 billion invested, producing both BMW and MINI cars in the UK. German energy firms are also heavily invested, with E.ON and RWE the owners of two of the six biggest utility firms in Britain. BASF has ten UK manufacturing sites. German firms have a total of €68 billion invested in the UK, behind only the Netherlands and France. In 2013 they earned €8.5 billion (or 0.3% of German GDP) from their UK operations. Most large German banks have major presences in London. For example, Deutsche Bank employs 9,000 staff and is not the only international bank to examine the logistics of relocating some or all of its operations if the UK leaves the EU.
The EU was the source of 46% of the stock of foreign direct investment (FDI) in the UK in 2014. This dependence has fallen steadily over the last few years (down from 53% in 2009). Germany alone was the source of 7% of FDI. The UK also attracted more of the capital investment flowing into the EU ($35 billion, or 28%) than any other country (Germany: $7 billion, or 5%). In terms of FDI projects, the story is very similar, with the UK attracting 887 projects in 2014, compared with Germany’s 763 and France’s 608.
Brexit would potentially make the UK less attractive as a gateway for investment into and out of Europe and as a base for international companies‘ European HQs. After all, half of all non-EU firms‘ European headquarters are in the UK, with the UK hosting more HQs than Germany, France, Switzerland and the Netherlands combined. Competition would develop to attract multinationals away from the UK, potentially benefiting major German cities, such as Frankfurt and Berlin.

Brexit: Impact on UK real estate markets

No market likes uncertainty. A “no” vote would not only result in political uncertainty surrounding David Cameron and a likely leadership contest within the Conservative Party, it would also trigger the two-year window allowed under Article 50 of the EU Treaty to negotiate an exit, creating an extended period of further uncertainty. KPMG research found that 66 per cent of real estate experts agreed that „Britain leaving the EU would have a negative impact on inbound cross-border investment“. Richard White, UK head of real estate at KPMG, commented, “regardless of the long term impact there is likely to be a pause in deal activity as investors survey the new landscape.” Some experts have forecast that Brexit could lead to a 25-30% drop in London office values. Not such great news for owners, but potentially good news for tenants if office rents are driven lower.
In May 2015, JLL wrote that, “Brexit will ‘barely blunt demand’ for UK real estate,” although they base this assessment on the assumption that the UK population will vote to remain in the EU, rather than exploring the potential impact of a vote to leave. No group of foreign investors owns more real estate in London than the Germans, with their properties worth a combined €15.8 billion. In 2013, German investors pumped €2.5 billion into the UK’s real estate markets, well ahead of the €900 million they invested in second-placed France. The UK was not just the most popular destination for German capital, it was rated the favourite destination for 29% of European investors in a CBRE survey (Germany was the second favourite, at 21%).

Brexit: Impact on German real estate markets

It is widely accepted that Germany is a safe investment haven. The uncertainty that develops in the UK between now and the referendum on June 23, plus the years of uncertainty created by a potential leave vote, should only serve to strengthen Germany’s position, although Germany, as a member of an EU faced with the challenge of dealing with the UK’s exit, could also find itself weakened as a result. Nevertheless, Germany is a major destination for British investors, who were responsible for €5.5 billion of commercial real estate investments during 2015 (second only to the €8.5 billion from US investors). Forecasts for 2016 are generally positive, with the only caveat relating to the supply of properties to the market. In the event of Brexit, it will be interesting to see what results from the exit negotiations in terms of new regulations or stipulations for UK investors (who would become non-EU investors). Foreign investment is, however, generally welcomed, and North American or Asian investors are already very active in Germany, so there’s nothing to say that investment from the UK would dry up.
If anything, the most interesting questions revolve around Germany’s ability to supplant the UK as the most attractive real estate market in Europe. Frankfurt’s office market could well benefit if major banks start moving out of the UK. Berlin, already a hotspot for international real estate investment, could also benefit as international companies take decisions about their European headquarters.
What is your take on Brexit? Do you think there’s no chance of a vote to leave? Do you think Brexit is the best for both the UK and Europe? What do you think the impact on investment and the real estate markets will be? Let us know in the comments section below, and don’t forget to follow us on Twitter and like our Facebook page!

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