27 Feb 2019

Brexit: Let’s hope British pragmatism eventually comes to the fore By Richard Croft, CEO M7 Real Estate

As published in Property Investor Europe on 19th February 2019


The Brexit campaign’s rallying cry was “take back control”. The debacle that is British politics does not look like anybody has taken back control except a three year old with hyper attention deficit disorder. The Brexit fallacy is that the Government is pursuing a narrow policy that is at best supported by 52% of the electorate (not of the population) and likely, according to every poll for the last six months, a much smaller proportion; and one that is, as most commentators agree, going to harm the UK economically. Brexiteers argue this is a cost worth paying for sovereignty. Whilst I am sure they really believe this to be the case, they forgot to mention it on the bus!

To meet Brexiteers’ demands to “take back control”, assuming that means the EU has no impact on British laws or business rules, the UK must leave the Customs Union and the Single Market (constructs the British ironically pushed for). Leaving the EU also means leaving numerous advantageous free trade agreements, with countries like Singapore and Japan, and Secretary of State for international trade, Liam Fox has palpably failed to make any real progress in replacing those agreements. So where does this leave us, with less than fifty days to go until the planned exit? Unfortunately nobody (I suspect including the Prime Minister) really knows.

There appear to be five potential outcomes as things stand.

The first is that Mrs May’s deal, with some minor amendments, is miraculously agreed with the Backstop, we all take a collective breather, the UK leaves in name only on the 29th March and we enter the transition period with the substantive agreement of our future relationship with the EU (and of course the Irish Border problem) still to be resolved. The referendum result is honoured but by any analysis the UK is diminished politically and economically – the reason why so many on both sides are so against the deal.

The second is that Article 50 is extended by six months allowing further time to finesse any deal. This currently seems the most likely outcome. To its detractors, it simply kicks the can down the street, but it will give the Government time to refine its deal or consider alternatives, including a General Election or indeed another referendum.

The third is that we revoke Article 50 – the only thing entirely in the Government’s control (an extension requires the EU27’s co-operation and approval). This seems the most unlikely outcome; it will be perceived to have ignored the referendum result and neither the Government nor Parliament has a mandate or stomach for such a move. Those in support argue we can restart the Article 50 clock again and that next time the British will have agreed what exactly Brexit is and what relationship we want with the EU.

The fourth should be least likely, the no deal Brexit. What that would mean on March 30th is anybody’s guess. It could, in extremis, lead to planes being grounded, shortages of goods across the UK, and the army deployed, but I think that is unlikely. Even in this scenario, many mini stop gap deals between the UK and the EU will allow essential trade to continue with as minimal impact as possible.

So what does this all mean for real estate across Europe? In occupier terms, not a lot. The market still believes a no deal is unlikely and business in the UK continues much as before, albeit with muted levels of investment. There are short term pick-ups in Amsterdam, Frankfurt, Luxembourg, Paris and Berlin as some businesses tire at the UK’s lack of planning and mixed messaging and take action, but for the vast majority there remains a wait and see attitude. That would change instantaneously with a no deal Brexit and, from the indications that we have from our own tenants across the UK, sentiment will in the short term likely turn negative.

Regarding the investment market, the ECB’s zero interest policy and the Bank of England’s near zero interest rate policy ensure there can be limited immediate distress for investors, aside from retail investments – which is not specifically Brexit-led. Outside primary centres development has been limited ensuring capped supply, so even with a substantial economic shock, commerce will continue and most businesses will survive. The key is to have a diversified, high income portfolio that is limited in regard to credit concentration, and, if there is a no deal Brexit, to ensure you have the firepower to take advantage of any short term dislocation.

I am no fan of Brexit, but I do believe British pragmatism will eventually come to the fore.