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Jonathan Lewis (JL): The importance of the EU to the commercial real estate investment market is primarily twofold.
The first relates to capital flows both to and from the rest of Europe. If the outcome was to withdraw from the EU there is likely to be less cross border investment which would adversely affect the market.
The second relates to the macroeconomic sentiment. If withdrawal is perceived as likely to slow growth of the UK economy this will mean investors become more cautious and occupiers become more cautious in committing to leasing more space.
Richard James (RJ): The political uncertainty surrounding the EU referendum, due to take place before the end of 2017, threatens the stability of the commercial property market in the UK, but the threat may well be temporary and part balanced by other factors.
The property sector experienced strong capital growth throughout 2014 and the first quarter of 2015 which has continued, albeit at a slower rate, for the second and third quarters of 2015. Economic projections do not presently show the pending referendum as a factor affecting investment in the UK for 2015. However, the effect of this perceived increased risk and uncertainty may be more apparent in investment over the next two years.
Particularly in the occupier market, overseas firms looking to establish access to the European market may choose to position their facilities in countries with guaranteed member status as opposed to the UK. Similarly, expansion within the UK from overseas investors may be delayed pending the outcome of the referendum. However, recently Nissan appeared to dismiss this consideration, investing a further £37m in the northeast to expand their operations.
RJ: Following a decision to leave the EU, there may be an initial detrimental impact on demand and a potential to slow the current growth of commercial property sector. However, this is likely to be temporary during the transitional period after the referendum, while an assessment is made by investors as to the overall economic impact.
With an ever increasing demand from overseas investors, supply may be a more compelling issue affecting the UK property market than the uncertainty surrounding the forthcoming EU referendum.
The demand for property in the UK continues to outweigh the supply. The comparatively high returns, access to financial and European markets in the UK means that longer-term investment is being made in the UK commercial property sector—ultimately impeding the supply—with the potential to hamper future investment.
The current lack of supply is increasingly being met by speculative development in regional centres. Such investments may suffer as a result of the perceived risk of the referendum, due to restrictions developers may face from institutional and other lenders during such times of uncertainty.
There is also the potential for the demand to ease. Membership of the EU has been cited as an important factor attracting and incentivising both local and overseas investors to the UK market which currently offers unrestrained access to the EU market.
In practice, both local and investors from outside the EU view commercial property in the UK as a good investment, being a country with a reasonably stable economy in which such an investment is relatively lightly regulated, compared to other areas in Europe. These factors will continue to facilitate movement in the market. However, the transitional period may see a reduction in the number of clients looking to undertake developments and longer-term investments, in favour of short-term investments with high yield offerings.
Practically, the repercussions of a decision to leave the EU may make lenders more cautious in the short term meaning investors would potentially struggle to obtain funding for more speculative development opportunities. Funding generally may be subject to prohibitively high premiums or the client’s themselves may be more reluctant to invest in a transitioning market place.
JL: In terms of property lawyers, the reality is that whether or not we are in the EU will make little difference on a day to day basis due to the fact that we already have our own very distinct legal system.
Of course, the role of the EU in setting Europe wide legislation and regulations does affect real estate lawyers, but I wouldn’t bank on the government having fewer rules and regulations if we came out of Europe.
JL: The impact of regulations from Europe in relation to matters such as the environment is important, but many of these are considered of importance to the UK government so I don’t envisage radical change.
The free movement of people within Europe has meant that there are massive resources in terms of human capital available to the booming construction industry. If free movement was restricted in some way there would be a significant increase in construction costs due to the shortage of construction workers.
Interviewed by Nicola Laver.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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