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Horizon Scanning | UK Real Estate 2019

Brexit - three months to go

Ever since the unexpected referendum result in 2016, the nation has been in a curious state of befuddlement and limbo. The process surrounding the UK’s departure from the EU has been enveloped by a dense and numbing political fog, punctuated by seemingly erratic whirlwinds of frenetic activity. Progress as to the terms of our exit - and future relationship - appears simultaneously to stand still, reverse and speed up. But, with approximately three months to go until 29 March 2019, the storm shows no sign of abating yet – if the last few weeks are anything to go by … that said, we can still usefully look at what, if any, progress has been made this year - and what effect this has had on the real estate market.

Brexit

What progress has been made?

It is fair to say that we know a lot more than we did this time last year. There have been a number of key areas of breakthrough – for example:

  • clarity as to the extent to which EU laws will be transposed or retained on Exit Day has been achieved in the European Union (Withdrawal) Act 2018, coined as one of the most constitutionally significant pieces of legislation in recent memory;
  • Theresa May’s deal” - despite a great deal of political controversy, the text of the Withdrawal Agreement has been finalised (governing, amongst other things, the 21-month transition period during which time the UK will continue to apply EU law and be bound by the jurisdiction of the Court of Justice of the European Union) and was officially endorsed by the European Council on 25 November 2018;
  • the Political Declaration has been agreed and published; while not legally binding, this sets out what the future EU/UK relationship might look like; and
  • it is clear that domestically the approval of Parliament will be required before the Withdrawal Agreement can be ratified – this has become known as the “meaningful vote” and is scheduled to take place on 11 December.

The remaining “unknowns”

Despite everything that has been achieved, there remain a number of “unknowns”, including questions on the Irish backstop and future trade relations. Certainly, the biggest “unknown” at the time of writing remains the question of whether Parliament will approve the Withdrawal Agreement. If MPs reject Theresa May’s deal, it is not clear what the route forward will look like – possibilities range widely and include leaving without a deal, renegotiating the deal, a “People’s Vote” (second referendum) or even a general election. Timing remains a crucial issue, as the Article 50 clock continues to tick (assuming that the Article 50 notification is not revoked in the meantime). All we can say with certainty, is that the outcome of the meaningful vote will be key to determining the next steps.  

The resilient UK property market

Economies run on confidence. There are, of course, many factors involved in determining the mood and movement of the UK property market – but few have a bigger impact than uncertainty. Whilst it may be both obvious and trite, pending agreement being reached on the future relationship of the UK and the EU, uncertainty prevails. However, despite being plagued by Brexit anxieties, the UK’s real estate market has proved to be surprisingly resilient.

The Financial Times has described the performance of the London commercial property market since June 2016 as having “defie[d] doomsayers”, with “fears of a Brexit slump [having] been replaced by the exhilaration of a deal making frenzy”. Certainly, a number of high profile transactions lend weight to this argument: billion pound deals have taken centre stage, as the “trophy” skyscrapers known as the “Walkie Talkie” and the “Cheesegrater” were each acquired for record prices of over £1bn, UBS’ London headquarters changed hands for £1bn, and Goldman Sachs’ new London headquarters was snapped up by South Korea’s National Pension Service for over £1.1bn. Facebook, Apple and Amazon have flocked to London to take up hundreds of thousands of square feet at Kings Cross, Battersea Power Station and Shoreditch – no doubt contributing to London being ranked as the top city for global real estate investment in 2017 - and, in the first half of 2018, overseas investors spent more in the central London commercial property market than in the commercial property markets of central Paris, Frankfurt, Manhattan and Munich combined. Strong results aren’t just limited to London, either - investment into UK regional commercial property reached £4.8 billion in the first quarter of 2018, 26% above the long-term average.

Of course, economic turbulence may still be on the cards – and Brexit may yet prove to be a cause of frustration for landlords who will, no doubt, be keeping close watch on a nationally significant case due to be heard in January 2019 in the High Court (with direction (unsurprisingly) that the judgment be delivered prior to 29 March 2019). Canary Wharf Group, being the landlord of a 25-year lease to the European Medical Agency (which has announced it will move its headquarters from London to Amsterdam when Brexit occurs), has sought a declaration that Brexit is not a cause for frustration of the lease (as the EMA has claimed) and that the EMA remains bound by its lease obligations (including the payment of rent) until the expiry of the term. If the Courts were to rule that the lease is frustrated by Brexit, it would automatically terminate - and so it is no surprise that the market is watching with baited breath.

It would be a brave person who tried to predict which way the Brexit wind might blow and when the fog might lift – the good news is that the UK real estate market appears to be weathering the storm reasonably well so far.

Brexit is still very much a moving target with the meaningful vote in Parliament scheduled for next week - we will however issue another Brexit update as the position evolves.

Brexit 

Ever since the unexpected referendum result in 2016, the nation has been in a curious state of befuddlement and limbo. The process surrounding the UK’s departure from the EU has been enveloped by a dense and numbing political fog, punctuated by seemingly erratic whirlwinds of frenetic activity. Progress as to the terms of our exit - and future relationship - appears simultaneously to stand still, reverse and speed up. But, with approximately three months to go until 29 March 2019, the storm shows no sign of abating yet – if the last few weeks are anything to go by … that said, we can still usefully look at what, if any, progress has been made this year - and what effect this has had on the real estate market.

"The process surrounding the UK’s departure from the EU has been enveloped by a dense and numbing political fog"

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Retail Insolvencies 

In the 12 months ending Q3 2018, the wholesale and retail trade sector saw the second highest underlying of new company insolvencies in the UK with a number of household names dramatically reducing their real estate footprint or disappearing altogether. Casual dining and fashion have been particularly affected, with the number of CVAs for Q3 2018 rising by 200% compared with the same period in 2017.  

"The number of CVAs for Q3 2018 rising by 200% compared with the same period in 2017"

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Overseas Investors 

In recent years, an increasing number of jurisdictions across the globe have either introduced new or strengthened existing rules controlling foreign investment: the UK is no exception and the trend for even greater transparency in UK real estate has continued, especially where overseas investors are involved, driven by the UK Government’s wider push to tackle corruption. Here we look at a number of the key changes which overseas investors in UK real estate need to be aware of; the likely impact of those changes and the reaction from overseas investors so far.

"$13.7 billion of overseas capital piled into the City in 2018 attracted by favourable occupancy rates, dependable investments with yields higher than elsewhere in Europe.” (Cushman & Wakefield: Winning Growth in Cities)

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New Telecoms Code

It is only in recent months that judgments on the new Electronic Communication Code (the “Code”) have started to emerge from the Upper Tribunal (which now decides telecoms disputes). They confirm what many businesses and individuals have sensed over the last year; that what has been referred to by the Tribunal as “the human right to mobile telephony” is likely to trump the human right to enjoyment of one’s own property. The new Code came into force on 28 December 2017 making it much easier for telecoms operators to acquire rights to install and maintain electronic communications equipment on, under or over land. In the absence of reaching agreement with the relevant landowner, an operator has the right to apply to the Upper Tribunal for an “enforced agreement”.

"The human right to mobile telephony is likely to trump the human right to enjoyment of one’s own property"                                                                 

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Tax Update 

What are the UK tax questions that matter most to the real estate sector? How will we be taxed on our income and gains, how much SDLT will we need to pay and what capital allowances are available are invariably near the top of the list. At least for some investors, the answers to all of these will be changing over the next couple of years. Add to this a new 2% digital services tax that will apply regardless of physical presence and there is plenty to think about following the 2018 Budget.

"As previously announced, the taxation of non-UK residents in relation to UK property is to be fundamentally changed"

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Regeneration

Urban regeneration is at a turning point. Even in our present polarised political climate, few would deny that there is a problem with housing capacity and affordability in the UK. Acknowledging the problem is, seemingly, the limit of the consensus. Perhaps one more thing is certain: private developers are inherently a key part of the solution.

"Genuine engagement with residents and other local organisations and institutions early in the development process is crucial"

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Prop Tech

From online estate agents to smart buildings, PropTech is infiltrating the real estate sector in many different ways; in some cases seeking to replace antiquated and inefficient systems and in others introducing new technologies to drive forward an industry that has traditionally been resistant to change. Few Real Estate professionals, whether millennials or baby boomers, would deny that PropTech is changing the Real Estate industry.

"Experts are predicting that technology will play an increasingly prominent role in how occupiers use and operate their Real Estate"

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Explore further topics across our UK Real Estate | Horizon Scanning 2019 publication.

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