Brexit and the UK economy
The referendum vote on 23 June 2016 had an immediate effect on the financial markets and the sterling fell to a 30 year low. Since then the financial markets have calmed and volatility is lower. The short-term impact of Brexit had reduced confidence in the housing market in certain areas, although there are of course other reasons.
On 29 March 2017 Theresa May triggered Article 50 which kick started the Brexit process. The exit negotiations awaited by the property market were proceeding slower than expected. However, The Prime Minister’s speech in Florence in late September outlined the government’s plans to keep Britain in the EU in all but name until 2021, five years after the vote to leave.
Contrary to earlier assertions of non-payment, in this more conciliatory approach Britain would also pay 20 billion Euros into the EU Budget in what could be only an initial down payment on what is likely to be a substantially larger bill to exit.
Just under half of our respondents considered that the vote for Brexit was not favourable to the UK property and construction market, closely followed by a similar percentage who were unsure. Very few respondents (9%) thought Brexit was favourable to the industry.
Respondents who consider Brexit unfavourable should be encouraged by the current plan that Britain would formally leave the UK in March 2019 but would remain subject to all EU rules, decisions of the European Court of Justice, the free movement of EU workers and the requirements to contribute to the Brussels Budget until 2021. However, there are likely to be further market fluctuations and uncertain times during the transition process. Much of the uncertainty that the property industry feels, revolves around what deal the UK government eventually agrees. The plans for Brexit were thrown into confusion after the June 2017 General Election that deprived Theresa May of a Conservative majority in Parliament.
Was the result of the 2016 EU referendum favourable to the UK property and construction industry?
Since forming a minority government with the support of the Democratic Unionist Party there has been speculation of potentially diluted policies. However some commentators and analysts forecast another General Election within two years.
Since Brexit, there is a need for ‘passporting’ arrangements for financial services and the possible impact this will have on London’s position as Europe’s financial centre. Various businesses and commentators highlight the risks of large numbers of financial services jobs that might need to be moved to other financial centres in the EU. Leaders of other European cities are actively promoting benefits of their cities as the obvious successor to London. Several banks have already established additional headquarters in other European cities such as Frankfurt and Dublin.
The type of Brexit respondents preferred
UK tax system and government priorties
Our respondents suggest that support for the UK property and construction market needs to be high on the government’s priorities over the coming year. Alok Sharma, the Government Housing and Planning Minister stated that industry leaders had identified five key priorities:
Indirect government investment through local authorities is expected to play a greater role over the next few years. The government launched a £2.3 billion housing infrastructure fund in July 2017 designed to support the infrastructure underpinning delivery of new homes. So far more than 150 local authorities have applied. Following the Grenfell Tower fire, public tension has focused on social housing but the demand by local authorities for social housing funding could suffer if the European Investment Bank cuts its future funding. 75% of our respondents said the current policy around the Green Belt protections were not conducive to solving the housing crisis.
The Help to Buy scheme since its launch in 2013 has resulted in over 120,000 people purchasing a new build home and assisted developers to build more homes. The government has committed £8.6 billion for the scheme up to 2021, thus ensuring continued support to home buyers and the stimulation of the housing supply.
Believed to be the biggest tax barrier to business growth
A potential barrier to the free movement of labour could increase the construction industry average wage, and the industry’s scope of operations could be reduced by the lack of skilled labour. The recent Brexit transition announcement will hopefully improve this outcome.
The increases in UK stamp duty land tax (SDLT) have resulted, as was widely predicted, in a considerable slowdown in the market. While the 2016 to 2017 SDLT statistics revealed that stamp duty receipts have risen, this should not cloud the reality of what is going on in the market. SDLT remains a negative levy. Aside from the fact that a reduction in SDLT – particularly for high value residential properties – would lead to higher revenues raised through an uptake in transactional activity, SDLT in its current form also reduces liquidity in the market. This is evidenced through the lower volume of transactions, and ultimately hits housing stock, resulting in unaffordable housing prices. This impacts ‘generation rent’ who have less choice and higher costs. The cost of materials used in the construction process has also risen due to the depreciation of the sterling. Conversely foreign investors benefit from the more favourable exchange rate.
Is the current policy around Green Belt
protections conducive to solving the housing crisis?
The economy growth, experienced after the Brexit vote, began to slow at the start of 2017 due to a flattening in consumer spending. A key factor for this moderation is due to the fluctuation of the Consumer Price Index (CPI) over the recent months. August 2017 figures showed a rise to 2.9%, an increase from 2.7% in July. The Bank of England August 2017 Inflation report forecast CPI to rise to just below 3%. The National Institute for Economic and Social Research, whose models are used by the Treasury, forecast that inflation could rise to 3.5% later in 2017. The value of the sterling continues to fluctuate in reaction to political events, but in mid-September 2017 hit its highest value against the dollar since the Brexit vote.
The Bank of England Monetary Policy committee voted on 2 August 2017 to maintain its base rate at 0.25% by a majority of six to two. These low interest rates are encouraging buyers to invest in real estate because of the low return in other markets.
The impact of technology
44% of participants identified the office market would be most affected followed by retail (35%). As to office occupancy, less space would be needed due to the rise in agile and flexible working with more staff working from home or working remotely. Technological advancements enabling offshoring and outsourcing would also see a reduction in support staff, thereby needing less square footage.
The retail market has been hit by consumer spending constraints and also by technological advancements, enabling consumers to buy all sorts of goods online. Retailers are having to rethink their business models and become ‘omnichannel’. The rise of online shopping has however had a positive impact on the industrial warehousing sector, boosting the demand for the construction of warehouses to meet the supply chain demand from consumers. In the last year alone, traditional stores have become increasingly redundant, with store closures being seen across the board, rising vacancy rates and an increase in retailer administrations and failures.
Which types of property are most likely to be impacted by technological trends?
National versus London
Results show that the residential London market will be affected by the low growth the industry is experiencing. The South East is regarded by our respondents as having the highest potential for investment in the next 12 months, this could in part be due to the development of Crossrail.
Outside of London, the West Midlands and the North West were regarded by 19% and 13% of respondents respectively as the best places for investment. Birmingham has become home to the largest professional and financial services sector outside of London. Due to its central location and comprehensive rail, road and transportation network Birmingham offers benefits for those looking to invest.
One reason the West Midlands is increasingly attractive to investors is in part due to the ‘Midlands Engine’ initiative which makes the East and West Midlands an engine for growth for the UK economy. This initiative is backed by businesses, local authorities and 10 local enterprise partnerships.
Beyond the British border
The majority of our survey respondents (77%) operated UK only businesses with 81% having no intention of overseas expansion in the next 12 months. 33% of respondents cited political uncertainty and anxiety about economic stability as primary reasons for not investing in mainland Europe.
Access to finance and tax burdens were also cited as barriers to investing in property in mainland Europe. However, Germany leads the field for 46% of our respondents as having the best potential for property investment due to its economy.
In the rest of this report we provide further analysis of our findings and how they impact the UK property and construction industry.