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Brexit and the commercial and residential property sectors - the legal implications

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It is perhaps too soon to assess the true impact of Brexit on commercial and residential real estate. However, there have been some immediate consequences which demonstrate that both sectors have found themselves on the wrong side of the fallout, meaning we could be facing a flat summer and a short-term lack of confidence.

Despite this, the hope is that negotiations with the EU will commence under the leadership of a new prime minister, enabling the country to get on with the business of devising a firm plan and implementing it in a positive way.

Short-term shock

We have already seen the value of the pound plunge, several property funds have suspended dealings, and some major UK businesses have decided or threatened to move at least part of their workforce elsewhere within the EU. A number of transactions have fallen over or been put on hold in the weeks following the referendum and we have even seen “Brexit clauses” being triggered. The shock has been particularly apparent in the house builder sector, where the value of some leading companies fell by 20% in the days following the vote. Meanwhile, some developers have put schemes on hold while they wait to see what happens over the coming months.

International influence

International investors have been concerned by the uncertainty and it is possible that the prime end of the market will be hardest hit. There is particular concern that London could lose its “safe haven” status, with investors selling their assets rather than watching them lose value. However, looking back to the 2008 crash, more overseas investors flooded into the market to snap up assets relatively cheaply.

Occupier market

There will inevitably be some focus on the occupier market which is very sensitive to economic change, in particular financial and professional services firms. Any impact would be felt nationwide as many regional centres are host to large numbers of such businesses. It is possible that landlords will face pressure to reduce rents to stimulate demand and that tenants might request rent discounts and breaks to take advantage of market conditions.

Retail

A potential hit to consumer confidence is not great timing for the retail sector and even in the lead up to the referendum consumers proved cautious and sales were down. Fashion retailers are likely to be hardest hit by a falling pound as costs will increase, but the supermarket sector could be the beneficiary of relief from the deflationary environment dragging revenues lower in recent years. The retail sector is already rapidly changing but Brexit may speed up those plans. We may also see the resurgence of the “Made in Britain” era.

Cause for optimism

The sector remains attractive – the prospect of more quantitative easing, a potential further cut in interest rates and lower corporate taxes are all aimed at stimulating the market and making the UK an attractive place to do business. It is possible that an emboldened UK, free to certain restrictions and regulations, can thrive outside the EU. Some factors remain unchanged – there is still a shortage of good quality affordable housing stock and people still cannot afford to get a foothold on the property ladder; supply of new offices spaces remains constrained and vacancy rates in cities across the UK have recovered post-2008. Moreover, unlike 2008 when the tap was turned off, now all the indications are that banks are still keen to lend.

Remain positive

Investors and the property sector generally may have overreacted but not without good reason. The UK remains an attractive proposition; it is difficult to see us simply rolling over and not fighting to put in place a framework which enables us to remain a competitive and attractive market, free of some of the regulations burdening the EU. Ultimately the impact on the property sector will depend on two factors: perception and confidence. There is a risk that we talk ourselves down and into a recession. However if we look outwards to the world and actively seek new relationships, the UK might emerge in a better and stronger position.

If you would like to discuss any aspect of this article, please get in touch with Ben Tarrant or your usual Thrings contact.

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