Brexit and CRE: The Only Thing That’s Certain is Uncertainty

On June 26, 2016, in a national referendum on continuing membership in the European Union, Britons voted to leave 52 to 48 percent. A formal departure notice was filed by Great Britain under Article 50 of the EU’s Lisbon Treaty, with the final deadline to leave the EU occurring on March 29, 2019. There is no final agreement about the specifications of the separation, but that could change quickly.

Some of the immediate post-Brexit questions impacting commercial real estate and equity holdings involve how the UK and EU will implement passport rights, the flow of migration and a visa system for workers, imports and exports tariffs for goods, and monetary flux. There are very real concerns that these ramifications might cause some or all of the following: temporary construction labor shortages (particularly for the UK’s largely Eastern European construction labor pool); goods and materials shortages (the UK trades as a net importer from the EU); reduced goods flow from warehouses based in the UK or to UK businesses from warehouses/offices based elsewhere; and significantly increased costs associated with white-collar workers who are European, non-UK citizens based in the UK (i.e. lenders and management teams).

When it comes to the details of how Brexit will transpire, the immediate fallout, or how regulations may change (if at all), the only certainty right now is uncertainty. However, whether you are an institutional investor with CRE interests or offices based in the UK, or a UK-based developer, there are some pragmatic steps that you can plan to ease anxiety and lower your risk.

1. When thinking about making new deals in the foreseeable future, exercise caution. For many developers and lenders, this may mean waiting out some initial uncertainty by either passing on or delaying transactions until there is clarity in the market. While some pending deals may still be worth moving forward with, be mindful of your development timeline and evaluate your hold term risk appetite.

2. Don’t look past the fact that there will still be lucrative deals to be made in the short and long term. There is growing optimism about the development and collaboration possibilities created by opening up trade between the UK and India, China, the US and Canada, among others. Because the UK will be free conduct business independently without having to adhere to European Commission rules and restrictions, construction projects all over the world will now be able to tap into investment resources and vast project management expertise within the UK.

3. Rely on an experienced, knowledgeable UK-based due diligence consultant through all phases of transactions, particularly as legislation changes are implemented. Most of these will be phased in gradually, and most regulatory issues (health and safety, building codes) aren’t expected to deviate wildly from EU standards. But remember, even the introduction of small changes can mean big liability or complexity in contracts. Thorough and expert assessment of your asset(s) will be essential in controlling and understanding risk exposure.

4. In-progress and new developments (particularly those with non-residential occupancy) may be heavily impacted by labor and materials shortages, as well as temporary cash influx issues. Construction risk management services will be an essential component of seeing these projects to completion on schedule and on budget. In particular, funds disbursement monitoring must be engaged to ensure monies paid to contractors does not exceed completed milestones. Project budget and timelines may need to be re-evaluated, which means document and cost review and construction progress monitoring may be readjusted accordingly.

Over time, stipulations governing imports/exports, passport rights, and business deals will be finalized and the details will fall into place. This will be a catalyst for the commercial real estate and financial worlds to adjust, and then start trading and making deals aggressively again. In the meantime, during the two-year post-Brexit “implementation period,” wherein the UK will work out the specifics of the EU exit and businesses and organizations are given time to adjust, business will still be moving forward, although at perhaps a lower rate. In the long run, London will remain an elite financial hub and destination for office, technology, and infrastructure, as well as a highly-respected source of construction and development expertise. Indeed, foreign investment in Britain remains strong, with 7% of international investors having increased investment since the EU referendum. Enlisting the help of UK-based local consultants, particularly those with experience assisting clients with commercial real estate interests on both continents, can ensure successful transactions and fruitful investments both now and in the future.