From the many polls taken before the referendum, it was clear that those actively involved in the real estate market were in favour of remaining in the EU. A narrow majority of the British public disagreed. So what happens next?


Although the result of the referendum is technically not binding on the Government, it is politically difficult to ignore. What we do know is that Cameron's "concessions", negotiated with the EU earlier this year, now fall away; his deal was conditional on a vote to remain in the EU meaning there is no going back.

With the Prime Minister announcing his resignation from October 2016, a new leader of the Conservative party is likely to be the one sitting at the EU negotiating table although with the possibility of another general election in the UK, considerable uncertainty remains not only at a macro level but also on a micro level within the borders of the UK.

Going forward, we now have to work out what our relationship with the EU will be. We have at least two years to do this, commencing on the date the UK government invokes its right to withdraw under Article 50 of the EU's Lisbon Treaty. Article 50 is vague and offers no clear path to an orderly departure. It provides that the Union shall negotiate and conclude an agreement with the withdrawing State, setting out the arrangements for its withdrawal and taking account of the framework for its future relationship with the Union. The UK government should assume that it has no longer than 2 years to negotiate the terms of our exit as any extension is subject to the consent of all the other Member States. They will only do so if it is in their best interests.

But the picture could be complicated further if referenda take place in other European countries, as has been demanded by political parties in France, Italy and the Netherlands. Should EU membership be put to popular vote, and they follow the UK in leaving, the EU could be faced with negotiating multiple treaties on separate fronts, likely affecting the UK’s own negotiations.

Property law for the most part falls within the scope of national oversight and has not been subject to harmonisation in the same way as other national laws. There are therefore few direct legal repercussions for the UK's property laws but the real estate market will undoubtedly feel the aftershock of the seismic impact of the UK's vote to leave the EU. While occupier demand is likely to reduce in line with any downwards economic adjustment resulting from the fall-out of the Brexit vote and as investor sentiment wavers causing volatility, a weaker Pound could help stimulate the global capital that has been sitting on the side-lines in recent weeks, which could in turn result in increased capital flows into prime UK real estate. In the short to medium term, a Brexit will mean uncertainty in the UK real estate market as everyone's attention is likely to be diverted to the withdrawal/renegotiation process. To make sense of this complex mesh of legislation and rules in a Brexit world will take a huge amount of thought and head scratching, and it would be premature to even begin to analyse this at this early juncture.

Overall, the outcome of the referendum has wide implications for UK economic performance, and the property sector is likely to feel the impact of these, both in the short and long term. However, the fundamentals that make UK an attractive place to invest remain despite a parting from the EU – the UK's connectivity with other global cities; its time zone sandwiched between the east and the west; and FRI leases with an average term of 7 years* by way of just a few examples.

While the UK's 43-year membership may shortly come to an end, uncertainty can provide opportunity and a number of REITs and real estate funds will be well placed to ride the wave that will now follow.

With the result having just been announced, and no path yet determined, investors should wait for further guidance from politicians and other policy-makers before making major decisions.

Key contacts

Lee Sheldon

Lee Sheldon

Partner, Funds and Indirect Real Estate
London

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Leona Ahmed

Leona Ahmed

Head of Real Estate Sector
London, UK

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