When UK Prime Minister David Cameron announced a referendum on Britain’s future membership in the European Union, back in February, few commentators foresaw how split opinion would be on the matter with just hours to go.
While the UK media is predicting a neck-and-neck finish, the bookmakers have barely wavered since strongly backing the victory of a ‘Remain’ campaign months ago. The current odds of Britain staying in the EU are 1/4, compared to 3/1 to leave.
“I wouldn’t be surprised at all if on Friday morning I woke up to find out that the whole thing had been a storm in a teacup,” joked Joe Valente, head of European real estate research at JPMorgan Asset Management – Real Assets. “In all seriousness, I do believe it is going to be a close run thing. But the best case scenario is a very clear cut decision, one way or the other. At least then we will be able to draw a line in the sand,” said Valente.
“If it's a close run thing, I think it could be messy because it has all sorts of ramifications for who wins, for the Tory party, for Scotland. So it may be that we may not be able to draw as clear a line in the sand that we hoped for,” he continued. “No major country has done what Britain may be about to, so looking for historic lessons is pretty futile, you’re not going to find them.”
The closest precedent in recent memory to tomorrow’s referendum, suggests Valente, was the decision by Britain to opt out of the single currency at the turn of the millennium.
“That was a huge decision. Similar concerns were raised then, the fear then was that investment activity would collapse as corporations and investors abandoned the UK and focused on the Eurozone,” he added. “But the opposite happened and real estate investment actually increased by 20 percent in the aftermath. So it doesn’t necessarily follow that investors will up sticks because of a Brexit.”
In Valente’s eyes, the UK real estate market has a number of variable qualities which will not change in the event of a Brexit decision. He said: “The UK attracts far more than its fair share of real estate investment capital for a whole manner of different reasons – transparency, liquidity, relative stability, rule of law, investor friendliness – none of which are challenged by an exit.”
Added to this, said Valente, the granularity of the real estate market means that the investment characteristics of central London cannot be replicated by simply increasing exposure, or diverting investment, to Brussels, Stockholm or Madrid. “There is no common market in real estate and neither is there one in the works. What an investor gets from exposure to central London is not better or worse, higher or lower, than what they may receive in an EU market; it’s simply different which, of course, is the basis of diversification.”
Should the UK decide to leave, Valente speculated, there could be immediate ramifications. “A temporary demand shock is possible, but not inevitable,” he said. “If the UK votes to exit the EU on June 23rd, it will mean that, on June 24th, the UK will also become the EU’s biggest export market. In other words, there is no financial incentive for the EU to suddenly introduce punitive trade tariffs,” he added.
So if there was “demand shock”, triggered by investment decisions being delayed, how would that scenario impact the real estate market? “It will impact the real estate market, in as much as it would coincide with already increasing supply in certain markets,” he said. “Against such a background, vacancy rates would rise and rents fall, a fact that has long been factored in by real estate investors.”
Valente does see two potential “red flags” on the horizon, however, with both relating to the perception of the UK in the eyes of investors. He said: “If investors see the UK economy as structurally weaker outside the EU, then it will be inevitable for the risk premium to rise and yields to move out. A temporary demand shock may be the outcome of Brexit, but that lies a long way from a state of permanent weakness.”
“The other red flag if the UK votes to exit, is the possibility that capital markets would turn their focus once again on a smaller, weaker and much less investor friendly EU. The long term impact on the EU could be as severe, if not more so, than the effect of a temporary demand shock to the UK,” he added.
So all that remains is to see how the British public votes tomorrow. Will there be winds of change sweeping through the continent or, as Valente puts it, will it all be a storm in a teacup?