Immediately following the EU referendum, there was a great degree of pessimism surrounding the outlook for the UK economy, UK real estate market and UK real estate finance market. Although the long term impact of Brexit is unknown, in the short term the impact has been more positive than many predicted.
UK Fourth Quarter 2016 GDP growth was 0.6%, which gave an annual growth rate of 2%. Whilst slightly behind the 2015 figure of 2.2%, it compares favourably with annual growth in France of 1.1% and Germany of 1.5%. In mid-December 2016 the FTSE 100 broke through the 7,000 barrier and has traded in a range of 7,000 to 7,300 since then. The FTSE 100 has risen 20% in the past 12 months.
On 1 February, Theresa May was successful in the Commons vote to trigger Article 50. Whilst proceedings to start Britain’s divorce from the EU may be just around the corner, we are unlikely to feel any immediate impact. Some commentators have suggested that it could take up to 10 years for Brexit’s full impact to wash through the economy and the property market in the UK. During that period there are likely to be other social, economic, political and technological factors that mould our economy and will have more of an impact than Brexit.
From a political perspective we are already witnessing the impact of the new US president and his expansionary policies. Given the importance of the US as a trading partner and political ally, the UK will be directly impacted by events on the other side of the Atlantic.
One advantage that the UK has over a number of its European counterparts is certainty - we know we are exiting the EU. The 2017 French, Dutch and German elections are weighing heavily on sentiment as is witnessed by the current euro dollar exchange rate (1.07), which Trump has recently claimed to be at an artificially low level, therefore having a negative impact on the competiveness of US products.
From a social perspective, we are likely to see further unrest from people who feel left behind by the country's elite. The refugee crisis is also not going away anytime soon and there is continued confusion surrounding the rights of EU workers to remain in the UK and the rights of UK citizens to remain working in the EU.
Although Deutsche Bank’s recent report on the City Office market claims that we will witness a large outflow of Banks from the City, the number and scale of these announcements are limited and therefore not material when compared to the City’s workforce of around 450,000.
Cities such as Frankfurt, Paris or Dublin are not able to compete with London in terms of the balance of infrastructure, history, culture, regulation, labour policies, education and language.
If we do lose the European headquarters of some lenders there are other potential occupiers who could fill the office and employment gaps, as we have seen with the recent commitments to London from Google and Facebook who are creating 5,000 new jobs in their offices in Kings Cross and Fitzrovia respectively.
From an economic perspective, we are likely to see an increase in inflation as the impact of the weaker pound leads to an increase in prices of goods and services. Any restrictions around foreign labour will also lead to upward pressure in wage rates as the pool of foreign labour reduces. This will be felt in particular within the healthcare, leisure and retail sectors.
UK interest rates will rise, although not until 2018. With US rates higher than the UK there is likely to be a further weakening of the pound, which could reach parity. Although this does have negative consequences, there are also positives as we have seen with UK exports becoming more competitive and the UK being more affordable as a destination for foreign capital.
Real estate in London and the key regional cities is likely to remain attractive to domestic and overseas investors who are keen on yield, given the low returns from bonds and the volatile nature of commodities and equities.
The UK real estate debt market remains very active, with a recent project sourcing debt for a prime London office attracting six offers of finance from Lenders from the UK, the US, Germany and the Netherlands. The low gilt and swap rates coupled with competitive margins make 2017 an excellent year to borrow new money or refinance existing debt facilities. For prime assets with a conservative LTV of 55%, it is possible to source interest only debt at fixed rates of just below 3%, for a five year term. This is less than half of the level witnessed pre GFC in 2006.
2017 in the United Kingdom is likely to be relatively stable from a political, economic and markets perspective, when compared to last year. However, I expect more turbulence to develop from 2018 onwards as Brexit turns from a concept into reality.