Friday, July 29, 2016

Brexit and its Impact on the property market in the UK

In the past few articles we have covered various aspects of the impact Brexit would have on the UK and its economy. In this article we are going to cover the impact on the property market in the UK. 

First we start off with the current property market situation in the UK. Then we will review the potential impact that Brexit could have on the same with special emphasis on the city of London. 

Current Status of the British property market

The British Property Market has been an extremely popular investment avenue especially for foreign buyers. Statistics show that in the years 2014 and 2015, around 50% of the all commercial property purchase transactions were by overseas buyers.

Will this be Sustained?

As we saw in the article on the impact Brexit would have on Foreign Direct Investment in the UK, it is quite possible that FDI inflows will continue to hold-up the current levels rather than take a drastic fall as many people have predicted. This is primarily because, majority of the buyers of commercial property in the UK don't do it for operational purposes. They use them as investments instead. Secondly, a robust legal system, the English language, transparency of the British Market etc. are not a consequence of the EU Membership. They have existed even before the EU was formed. Therefore, it is highly unlikely that the UK Property Market will go into a Deep Slump as people predict.

The City of London and Brexit

Of all cities/towns in the UK, if there is one city that is going to be at the heart of this Brexit Impact on the UK, it would be the capital city of London.
The argument here is very straightforward. If companies are forced to relocate to other parts of the EU to continue their EU Operations, demand for office locations in London could shrink significantly. Even if companies don't do a full relocation, they could potentially scale back their operations in London which would again have the same negative effect. As with any city that boasts of being a Financial Hub, there are numerous projects that are always in pipeline to create more office space for businesses to expand & occupy. With this potential slow-down, the amount of office space available for occupancy could be well ahead of the utilization rates. That means – Vacancy Rates for Properties will go up and Rental Values will go down.
As a consequence, the premium commanded by the city office space may no longer grow at the rate it has grown over the past 15-20 years. In fact, property prices have literally doubled in the last 15-20 years in central areas of the city. This all in paper could potentially cause the property prices to fall by around 8 to 15% depending on the exact location of the property.

However, of crucial importance is the fact that, financial services companies aren’t the only ones that have been driving up the consumption rates of office space in central London or even in the city as a whole. Yes, financial services contribute about 16% of the space being utilized but the rate at which new jobs have been created in this industry has been quite slow @ 6%. So, bulk of the office space that is currently available is being used by other professional, scientific and technical services. Most likely these will continue to operate in the city even after the Brexit terms is finalized.

Couple that with the fact that, the city office space vacancy rate is just 5% in London. It is quite possible that firms have been reluctant to expand into London citing this space constraint. So, if the demand from the financial services side goes down, it could be a blessing in disguise as it could potentially boost the availability (and as a result drive the demand) for other sectors. If this happens, the fall in property prices as well as rental yields may not fall by the 8-15% as was mentioned a little while ago.

Some Last Words: Neutral Outlook

It is very clear that the City of London is going to bear the brunt of the Brexit impact on the British Property market. However, the damage that could be done isn’t as catastrophic as one would imagine. There could a small setback in the short run which could result in a minor price correction. But, it is very possible that prices will stabilize and the market will get back on its feet in a few years’ time.
Of course, the eventual impact is going to hinge crucially on the terms that the United Kingdom can negotiate with the EU.

Disclaimer: All views presented in this article are those of the Author and are not endorsed by anyone. While every effort has been made to ensure that the data quoted and used in this article is reliable, there is no guarantee that it is correct, and the Author accepts no liability whatsoever in respect of any errors or omissions. This article is only economic research and is not intended to constitute investment advice, nor to solicit dealing in securities or investments.

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