The Fallacy of Brexit

20th June 2016 London, UK, 20 June 2016 – Written by Richard Croft, as published in Estates Gazette:

When first thinking about this article, my overriding concern was about being too confrontational and keeping a measured tone. I am very firmly in the “Remain” camp and, whilst you should always respect opposing views, as the debate evolves I find myself becoming more perplexed by the Brexit arguments, which appear more emotional than rational. The concept of sovereignty, whilst appealing, is, in my opinion, becoming outdated.

As this article is for Estates Gazette I am only allowed c. 800 words, so I will focus mainly on what impact I believe Brexit will have on real estate markets.

Pretty much any Brexiteer will say that the Remain camp has propagated “Project Fear” and that we cannot know many of the outcomes of a vote to leave. This is where our Brexit friends have it wrong as many, quite independent, people have told us what will happen. The Bank of England, the IMF, the World Bank, the President of the United States, J.P. Morgan and mostly recently Michael Bloomberg, to name but a few, have all warned on the economic consequences. The fact that the Brexit camp have ignored these warnings and dismissed them with the handy, but populist soundbite – Project Fear – is erroneous as Brexit certainly has the capacity to create a global systemic shock. Best case, it will cause a medium term slowdown in the UK and probably Europe, whilst capital determines what the impact of a Brexit means. Worst case, it starts a series of events that could lead to the dismantling of the European Union and another global financial crisis.

Whilst I hope, and think, that a Brexit vote would be contained, the law of unintended consequence cannot be ignored. The weakening of Sterling after the announcement of Boris Johnson’s overtly political defection to the Brexit camp was a very clear indication of what the capital markets’ reaction to a leave vote would be.

The impact on real estate, particularly in the UK and especially in London, is a likely substantial reduction in liquidity which will result in a reduction of the bid. The difference between 2008 and now, though, is zero percent interest rates which will protect income producing real estate so there is unlikely to be any immediate distress. However, on the balance of probabilities, this would create a significant market hiatus with investors unwilling to invest without a substantial discount and potential vendors having the cash flow to attempt to sit it out. The issue itself, in the short term, will not be a collapse in capital pricing but the impact on the occupational market, which in due course will have a knock-on impact on the income that can be generated from the assets, which, in turn, has to cause a medium term downward drift on capital values.

With so much potential geo-political risk around the globe from a slowdown in China, a Trump presidency in the US, to the ongoing upheaval in the Middle East – which has huge security implications on the EU – coupled with the relative poor performance in the equity, fixed income and commodity markets, the real question for the Brexiteers is “why now?”. There is no doubt that the EU Commission and Parliament need structural reform, but I genuinely believe that is inevitable anyway, as we are not the only member of the EU with doubts about its current trajectory. Having said that, we seem to be forgetting all the immensely positive things that the EU has achieved, from the single market to open skies and, lest we not forget, a period of over 70 years of continuous peace on the Continent.

Of course the Brexit camp is right that we cannot know the long term consequences of a leave vote because so much will depend on how other people and nations respond. That, however, is precisely the fallacy of the Brexit campaign. This vote is not really about us; it is about the global impact of our actions and how the rest of Europe and the international community react.

The Brexit campaign appears to ignore the fact that the world has moved on substantially and is, through ever improving communication, only going to integrate further. I, for one, would much rather try and improve the construct of the EU from the inside than find us isolated both commercially and politically, which I believe is a very real risk should we not vote Remain on the 23rd. It is quite clear to me at least that if we were to vote to leave, as a nation we would not make any new friends, whilst simultaneously antagonising our existing ones, and that cannot be positive for our industry.