Alex Price Brexit commentary – The unstoppable force meets the immovable object

Every modern British political generation has faced crises, from Churchill (World War II) to Macmillan (Suez) to Thatcher (The Falkland’s) to Brown (Global Financial Crisis). Boris Johnson’s tenure as PM has only just started but he is already facing this generation’s political crisis, leaving the EU in three months’ time with only the barest of bones of a future arrangement in place. In the past, politicians have reacted to crises usually not of their own choosing and not of their own making, always seeking a solution that is the least damaging to the nation’s interests.

This time, for the first time in my lifetime, it’s both the choice and policy of the new Prime Minister to accelerate the crisis and to claim he will accept “no deal” as a policy despite its likely damage to the UK’s economy, blaming an EU that is unable to be flexible due to its scale and complexity. This moment has arisen due to a British governing class ideology built on memories of the past, a UK electorate disenfranchised by the inequality of the present and a lack of European consensus over dealing with its future challenges. The question now is how UK real estate investors should be planning for this uncertain future and here are a few thoughts:

Firstly, assume that the UK will leave the EU with only the essential elements of the future trading arrangements in place and the exit will be in the coming months not years. It is possible that the PM is simply negotiating when he says;

“We are getting ready to come out on October the 31st. Come what may . . . Do or die.”

however, with so many hard-line pro Brexit politicians appointed to senior roles in Government, it very likely that our pirate captain will be forced to “walk the plank” even if that means leaving the rest of the crew in a drifting ship heading into stormy seas.

Secondly, assume with “no deal” the UK economy will suffer, as even the government admit they have limited visibility post Brexit. The new UK Government Minister Jacob Rees-Mogg says that;

“We won’t know the full economic consequences for a very long time. The overwhelming opportunity for Brexit is over the next 50 years.”.

In the short term, this means a sell off in UK commercial real estate assets as investors reduce risk in their portfolios and overseas buyers stay away. It may also see users of commercial real estate pause any plans to expand and to focus on cost efficiencies in their portfolios, with surplus assets being sold and rental growth muted. It will also lead to a period of instability as the UK needs to rebuild trust and trading relations with the EU.

Thirdly, assume that sterling will weaken with looser global monetary policy, but that UK interest rates will also stay low alongside a broader fiscal stimulus to the economy. A PM so steeped in Churchillian history will use large scale government borrowing to boost the “wartime” economy. A price worth paying to ensure freedom from the EU for future generations, even if it is they who will inherit the debt? Until sterling has hit an exchange rate nadir, overseas buyers will avoid the UK and even then, the UK and even then, the strong UK reputation as a place to do business will take time to rebuild. Conversely, with interest rates low, inflation potentially rising and few alternatives for generating secure lower risk cash flows, demand will grow for core, Grade A, index linked long leased assets, driving prices up as the shock of a harder Brexit wears off.

Fourthly, opportunity will abound across UK real estate to reposition assets to meet the longer-term trends. These include acceleration of change through technology, demand for space due to UK population growth and rapid urbanisation driving regeneration and new infrastructure. All corporates, whether manufacturers, banks, professional services, or others will need to change their global real estate footprint as a result of these macro trends. What the UK will have in the next few years is Brexit being the catalyst to push the wholesale reshaping of our real estate market, underpinned by the engine of a top 5 world economy, stimulus from a government determined to show the world that leaving the EU can be done and a structural short-fall in urban and residential accommodation.

In the short-term investors should focus on ensuring their UK real estate assets have the quality and financial headroom to sustain a short-term shock and accept a market that is risk adverse and lacking confidence. However, if you believe Warren Buffet when he says,

“Be fearful when others are greedy and greedy when others are fearful.”

then the UK should be on every investors watch list post-Brexit. Whatever the cost for future taxpayers and the problems agreeing a new trading deal with the EU, the government will want to ensure a “hard” Brexit Britain is a success and with ultra-low borrowing costs set to remain they may be able to do this. Even if a 2019 general election causes a change of direction and Brexit is cancelled, then the UK currency and markets will see a relief rally of epic proportions.

At Fiera Real Estate we make money from supplying shelter and service to our customers. Within the Palmer Capital UK business, soon to rebrand to Fiera, we use our deep knowledge of the market to assess risk and return, an operating partner model to access the broadest opportunity set and the local skills required to execute. Our investors have benefited over twenty-five years from superior returns due to this vertically integrated business model. Brexit is a short-term threat but it is also a once in a generation opportunity for long-term investors, provided they can look beyond the nouveau Churchillian rhetoric of our new Prime Minister.

Written by Alex Price, CEO.