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Brexit: The European View

After waking up to the news that Britain had narrowly voted in favor of leaving the European Union, a decision which left British Prime Minister David Cameron (pictured) with little choice but to resign, PERE spoke to a cross section of voices across the European private equity real estate world to glean their reaction. 

After weeks of campaigning, the dust finally settled this morning on the most divisive political debate in the UK for a generation 

The capital, which voted strongly in favour of a ‘remain’ decision, is suffering from a palpable sense of shock this morning as financial markets and institutions take stock and carefully consider their next move.

Words such as caution and uncertainty have regularly cropped up in conversation since the result was announced, but so have words such as opportunity and positivity, so clearly it is not all doom and gloom.

The reaction from the private real estate industry has varied depending on the individual firm’s investment strategy. Those deploying capital using long-term, through-cycle strategies have reacted differently to the anticipated market volatility, than those with shorter term ambitions.

Neil Williams, group chief economist at Hermes Investment Management, which manages the BT Pension Scheme, said he believes that while its currency and stock markets may suffer in the short-term, Britain would prosper after a period of adjustment.

“Equities and the pound may remain vulnerable given the likely hit to UK growth, and risk now of weaker ties with our main trading partner, foreign direct investment, foregone and a diluted relationship with the US and other third parties that use the UK to access the single market,” he said.

“The UK economy will of course ‘survive’, given its entrepreneurial flair, increasing focus on non-EU trade, and likely policy accommodation by the Bank of England and UK Treasury,” he added.

But the real extent of the damage, continued Williams, will not be known until the manner of Britain’s exit is known. “The mark-down on assets would surely be greatest in the case of a ‘hard exit’ – entailing an acrimonious departure, lower trade, lower migration, and recession – than the more probable ‘softer’ version,” he said.

“But, even a ‘soft exit’ to a Norway or Switzerland-style associate membership will probably need several years just to end up close to ‘square one’. Greenland’s soft exit in 1985 had taken three years. We, larger and 43 years entwined in the European project, will need even longer,” Williams added.

The ripple effect of the UK’s decision to leave the EU has been least felt by through-cycle investors with a clear, long term strategy. Lim Chow Kiat, deputy president of GIC, the Singaporean sovereign wealth fund, said his firm had prepared for such an outcome. He said: “GIC runs a long-term and diversified portfolio. We are prepared for a period of heightened market uncertainty. What's most important to us is that markets remain open

Charles Weekes, chief executive officer of Cornerstone Europe, which has 13 offices across the continent, said although his firm was “disappointed” with the result, but that there was also opportunity. He said: “We represent long-term strategic investors, so we are buying through cycles. If we see opportunities as a result of this, in terms of a weakening in pricing and stuttering rental growth and these having an impact on pricing, then I think we would look to take advantage of those situations and look to acquire and build out our portfolio.”

“Longer term we are very comfortable in the outlook for the UK economy. But this is an interesting time for the property market,” Weekes said. “If you look for positives you’ll find lower interest rates for longer, which is good for real estate, a falling pound makes our export more competitive, which might be a boost for the economy.”

Meanwhile, experts from real estate investment management firm LaSalle and global property consultants Cushman & Wakefield both felt that there would be a period of uncertainty in the coming months.

John Forrester, EMEA chief executive at Cushman & Wakefield, said he believed the impact of the vote will be felt beyond the UK’s shores. “While the decision of the UK electorate is now confirmed, a period of further uncertainty is unavoidable as businesses, the financial markets and the political establishment in the UK, Europe and globally come to terms with what this means,” he said.

Alan Tripp, UK managing director at LaSalle, said his firm feels that while the long-term impact of Brexit is broadly neutral, it expects there to be a short-term market overreaction. He said: “Early capital market signal seem to indicate that this may well be the case and real estate performance objectives may now come under considerable strain in the next 12 to 24 months. However, we have been working closely with our clients, adopting a balanced approach on risk, to streamline their real estate portfolios at this maturing stage of the cycle,” he added.

Manish Chande, senior partner at London-based fund management firm Clearbell, believes that despite the Brexit vote, the UK’s appeal to foreign investors would not be dimmed in the long-term and added that any subsequent market volatility could offer interest to the smarter investor. “The decision to leave the EU may create some short term volatility and cause some investors to put decisions on hold. But we saw during the referendum campaign that this created buying opportunities at significant discounts for savvy investors,” he said. “As the uncertainty gradually lifts and investors are reminded of the strong fundamental factors that make UK real estate attractive, we’d expect real estate activity to pick up,” he added.

On the agency side, Richard Garner, head of commercial real estate at London-based property consultants Daniel Watney, fears that major occupiers could make good on their pre-referendum threat to leave the country if Brexit took place. He said: “There are a lot of reasons for them to stay in London, from convenient time zone to strong regulatory environment, but the prospect of losing access to the single market may be too much. For more risk-happy investors, the fall in the pound may prove a good buying opportunity, but the turbulence caused by the out vote will likely mean many stay away, with London's safe haven status now in doubt.”

Yet Mark Bladon, a property lender at Investec Structured Property Finance, backed Britain’s reputation and global standing which he suggested will be unaffected by the referendum result. He said: “The UK is the world’s fifth largest economy, with London recently named the world’s top financial capital; this pre-eminence is a result of centuries of growth and prosperity. London and the UK’s advantages over other large financial centres are numerous, but the main ones include the favourable time zone, strong rule of law, common language of business, as well as a much-envied regulatory environment; none of this is going to change as a result of today’s vote.”

So despite an initial city-wide sense of shock, there is confidence in certain quarters that, following a short period of adjustment, Britain’s international reputation, expertise and rule of law, combined with London’s standing as a global financial powerhouse, will endure and protect its long-term attractiveness to investors.

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