Following the UK’s decision to leave the European Union back in 2016, European politics had taken an unexpected turn, confirming divisions among country members existed, despite the apparent image of unity. This is a situation that could reshape the economic picture, both in a positive or negative way, meaning we must keep track of the latest developments and act accordingly. I’m Ofir Eyal Bar, a real estate investor and I would like to talk briefly about Brexit and how it could impact the real estate market in the months ahead.
The Brexit situation
It took more than three years until British politics managed to find common ground and in December 2019, Boris Johnson had managed to obtain a solid majority in the Parliament. As a result, the Withdrawal Agreement with the EU had been passed and since January 31st, the UK is no longer an EU member. Although uncertainties had been high since the 2016 referendum, some European real estate markets had been favored. London had been severely hit and as a result, Paris had become one of the top destinations for real estate investors. Big cities like Berlin, Lisbon, Madrid, and Rome had been other attractive places for big investments since investors had wanted to move away from any potential risks. With the likelihood of the UK leaving the EU without a deal present, and with great economic consequences if that would have happened, London had lost its top real estate spot. Prices started to top and drop in some cities, proving the pressure was mounting and high valuations were no longer sustainable.
The calm before the storm?
Now that we are certain the UK is no longer an EU member state, a transition period ending on December 31st, 2020, had started. Until then, both the UK and the EU will need to agree on their future relationship. This could turn out to be a challenging task according to most political analysts, because of the complexity of issues as well as divergence on matters like migration and free trade. Based on a recent The Guardian report talks over the future relationship will start on March 3rd, as it has been agreed after a meeting between European officials led by Michel Barnier and Boris Johnson’s adviser, David Frost. The talks will begin one month after the UK officially left the EU, meaning there will be only 10 months left to agree on all the matters. The pressure is expected to mount again, given the UK Prime Minister’s commitment not to extend the transition period past December 31st, 2020. Although this is used as a bargaining chip in order to gain more leverage in the negotiations, economic activity could suffer since it is still possible for the UK to leave without a deal in place.
Negotiations for future relations
EU’s demands for a “level playing field” are expected to represent a serious issue. In addition, we must take into account that the EU does not have any zero-tariff or free-trade agreements with any country in the world and based on the latest information, that’s what the UK aims to achieve. Since solving all the issues within 10 months seems nearly impossible (the EU recently signed a more limited agreement with Canada and negotiations took around 7 years), an extension of the deadline seems inevitable. Under which circumstances will Boris Johnson agree on that is still unknown, meaning there could be renewed pressure on real estate areas highly dependent on the trade between the two blocks.
Real estate developments
Since both sides are expected to put pressure on one another in order to gain the upper hand, 2020 should be another year when real estate investments are made with a cautious approach. London property prices should cool down further, a process that might intensify if more big companies will announce a shift to other European countries. If we do simple math, in case the UK leaves without a deal, it will lose access to a market of 27 states. On the other hand, the EU will only lose access to a single country. Although some businesses selling their products to the UK might be hit, it’s obvious the greatest problems are on the UK’s side. The shift towards other popular European cities should be a trend to continue in 2020, with real estate investors sentiment expected to fluctuate based on how negotiations will unfold.
To sum up, a challenging period lies ahead for European politics and no matter the outcome, it will reshape relationships that had lasted since World War II. Without compromise from both sides, many severe effects on the business community should be expected. Other less-developed real estate areas, or big markets like the United States, could benefit from the uncertainty in Europe until a common ground will ensure stability.