Investor Event

Commercial Property and Brexit

This blog gives you the latest topical news plus some informal comments on them from ShareSoc’s directors and other contributors. These are the personal comments of the authors and not necessarily the considered views of ShareSoc. The writers may hold shares in the companies mentioned. You can add your own comments on the blog posts, but note that ShareSoc reserves the right to remove or edit comments where they are inappropriate or defamatory.

In a previous article I discussed what might be spooking the commercial property market. Share prices of companies such as British Land and Land Securities are down by as much as 25% since last November. Was this due to the threat of changes to the tax allowances for debt finance? I surmised not. But there is one very good reason that has become apparent – namely the alleged threat of Britain’s exit from the EU (Brexit).

Capital Economics LLP have published a 30 page report (commissioned by Woodford Investment Management) on “The Economic Impact of Brexit” which is available on the web. I’ll cover what it says more generally later, but it does specifically cover the impact on the Property Market towards the end. It initially says for example that “It seems likely that leaving the European Union would hit the health of the City and it is plausible that a number of overseas institutions would close or scale back their London operations, putting a dent in occupier demand. That drop in demand could come at an unfortunate point in the development cycle. Over the next few years, the office development pipeline in central London is likely to run ahead of recent rates of net absorption, with the bulk of that surplus space destined for the City. A sharp drop in demand could see vacancy rates spike higher and rental values start to fall.”

Is that and similar forecasts what has damaged investors perception of such companies? The report later emphasises that even if the financial sector is negatively impacted by Brexit, that would not necessarily affect property demand as only 6% of new jobs that are being created are in financial services. Indeed it concludes by saying: “It is certainly possible to tell a story in which the damage done could be considerable but the role of the financial services sector in holding up the property market is probably overstated, leading us to believe that any negative impacts will be small, certainly at a macroeconomic level.”

On the whole the report is somewhat neutral about Brexit and discounts the extreme views of both supporters and detractors. For example it says: “It is plausible that Brexit could have a modest negative impact on growth and job creation. But it is slightly more plausible that the net impacts will be modestly positive. This is a strong conclusion when compared with some studies”. It is certainly worth reading as a balanced attempt to reach some conclusions on the financial issues, and for their comments on the commercial property sector.

ShareSoc Survey Results

We collected the views of ShareSoc Members on Brexit in a recent survey. The survey obtained a response of only 3% which suggests that most people might be somewhat apathetic on the issue or are fed up with being bombarded with news stories on the topic. But of those who responded 57% said they would vote now to leave the EU if asked, while 34% would vote to stay. Some 86% of respondents said that David Cameron’s recent proposals to the EU have not changed their minds and 68% said he should hold out for more concessions.

As regards the question as to whether leaving the EU would damage the investments they hold or the economy in general, 48% replied No versus 27% who replied Yes with a high 22% of “Don’t knows”. The main factors that are influencing their decisions were given as the General Economic Impact (73%), the EU Regulations & Sovereignty (73%) and Immigration Impact (51%). There were a lot of individual comments made so it seems that those who did respond to the survey often have strong views on the matter. For example: “The UK’s last best hope to keep out of a superstate”; “Voting for Brexit without knowing our subsequent relationship with the EU seems to me rather like diving into a swimming pool without checking whether there is any water in it”; “Very badly negotiated so far – but negotiating with 26 other countries and with bureaucrats in Brussels bound to be difficult”; “I do not believe we will get out. Project Fear will work for those too busy, too ill-educated, too ill-informed and just too frightened of change”; and “Cameron has really dug himself a big hole out of panic. IF we do vote out it might give the EU people such a shock they will change but I rather doubt it”.

It would certainly appear from the results of this survey (and particularly from the comments added) that respondents are more concerned about the general economic impact and the issue of sovereignty than the impact on their personal investments. Many made it clear that they did not wish to be part of a larger political union and were concerned about the EU’s bureaucracy and cost. The deal being negotiated by Mr Cameron does not contained enough certainty and rigour to assuage those who are concerned about those aspects.

Roger Lawson

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