Brexit: you get what you wish for…

August 15, 2016 admin

They said it wouldn’t be long before the impact of Brexit made itself felt. The 52 percent of the British population that voted for Brexit, for the United Kingdom to leave the European Union, may have had a warm glow on the morning of June 24, but the dire warnings issued in the run-up to the referendum — by politicians, economists, world bodies and world leaders who did not want that outcome — are starting to be realized.

In response to an expected reduction in economic growth, the Bank of England on Aug. 4 cut the bank base rate to a new low of 0.25 percent and introduced a further round of quantitative easing. The inflation rate is now expected to rise rapidly from the CPI number of 0.5 percent for the year to June 2016 as the higher cost of imported goods, itself a reflection of the reset and sharply lower exchange rate between the pound and other major currencies, pushes through. Suggestions are that it could go as high as 4 percent. Holders of index-linked government bonds won’t mind that.

Despite low levels of U.K. unemployment and continuing GDP growth, the feel-good factor has disappeared. Yes, the British people wanted Brexit, but they didn’t necessarily want what will come with it. The 48 percent of people who did not vote for Brexit will be saying, “Knew it, told you.” It will be up to the Brexit negotiators to carve out a divorce deal with the European Union that works for everybody. (Actually, I don’t see Brexit as a divorce, more as a decision by a disaffected club member to no longer want to be a member of the club. A reverse blackball.)

For property investors, the first ramifications are there to see. The obvious immediate impact has been in the U.K. commercial property market, where capital values and investor activity were showing signs of strain even ahead of the referendum. The CBRE U.K. Monthly Index for July 2016, published on Aug. 8, provided the first post-Brexit evidence of decline, with a 3.3 percent drop in capital values recorded for the month, pulling year-on-year growth down to 0.4 percent. According to CBRE, that fall was “widely expected.” Encouragingly, rental values across the U.K. commercial property market in July remained steady.

Miles Gibson, head of U.K. research at CBRE, says:

“Capital value growth was always expected to falter at some point during 2016, as global economic uncertainty cast doubt on the likelihood of the strong growth seen in previous years persisting for much longer. The Brexit vote has now crystallized that expectation, though it is not the only driver of it. It is reassuring to see that rental values have held firm in the face of this heightened uncertainty, a positive sign that the UK occupier market remains strong, sustained by record levels of employment and low borrowing costs.”

Gibson adds that “it will be some time until we understand the full impact of the Brexit decision, but the Bank of England’s base rate cut and more quantitative easing are likely to be supplemented by a similarly supportive fiscal stance in the autumn.”

That’s a reference to the fact that the U.K. finance minister is expected to announce some relaxation of austerity in his autumn statement along with taxation changes, probably toward the end of November. Things such as a cut in the VAT rate, maybe in income tax rates, more action on corporate tax rates; all designed to counter a downward cycle. Yes, works for me.

Source: CBRE

Source: CBRE

As an aside, have you noticed how quickly the term “Brexit” has entered the popular lexicon, as a noun and as a verb? And not just in English.

RichardFlemingThe views, statements and opinions expressed in this article are those of the author and are not necessarily those of Institutional Real Estate, Inc.

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Richard Fleming is senior editor of Institutional Real Estate Europe.

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