Pre-referendum

The UK commercial investment and leasing markets are currently experiencing lower levels of activity than last year, with some decisions no doubt being delayed until after the referendum. This is typical of the run-up to most general elections, and also what we saw in the run-up to the Scottish referendum. Q1 2015, however, before the last UK General Election, was an exception to the rule, seeing a 57% rise in activity on Q1 2014.

In mainland Europe we’re seeing slightly higher levels of indecision amongst EU-domiciled investors as they watch to see what the UK does, but deal flows in H1 2016 are expected to be broadly unchanged. Retail property might be affected by some short-term consumer confidence issues as the referendum date draws closer.

Post-referendum

If the UK chooses to remain in the EU on the new terms negotiated in February 2016, we forecast a rapid return of confidence leading to higher than normal deal volumes in Q3 and Q4 2016, and potentially some yield hardening due to competition.

The scale of this bounce-back could be considerable, with investment volumes in Scotland in the second half of 2014 after their referendum, being 45% higher than the norm for that period.

If the UK chooses to leave the EU we are likely to enter into at least a two-year period while the terms of exit are negotiated. Some occupiers are already preparing contingency plans for this and there is likely to be a period when they are more likely to renew leases rather than move, while they make their own plans about their European strategies.

Major London corporates are very unlikely to move their businesses from London to within the EU. However, their future headcount growth may be stronger outside the UK than in it, and this has implications for office take-up in London over the medium to long term.

For those which chose London as the location for their HQs in order to get a toehold in Europe, in the medium to long term some might move to within the EU, as may some European retailers. Finance occupiers are most concerned about the impact of a Brexit, although some have stated that if they did want to relocate this would be a long-term play and currently other major European cities do not offer the space or pool of staff required to support a move.

Retail property may experience limited medium-term impacts. Some retailers have suggested that employment costs might fall in the UK as some of these are related to EU legislation, but any change is likely to be minimal.

The impact on industrial occupiers is also likely to be relatively limited as, while many manufacturers rely on a wide European supply chain, their investment in plant and machinery in the UK is significant enough to rule out any immediate decisions to relocate. The most likely short-term impact will be increased operational and tariff costs for exporters at the point that their products hit an EU border.

In mainland Europe, leasing activity may see a medium-term boost as demand for office space in key alternative locations to London such as Berlin, Frankfurt and Paris rises. However, this activity may be undermined by potential further uncertainty if any other countries consider renegotiating their own terms of EU membership.

Over the short term, there will be a decrease in UK investment activity as some investors choose not to commit to the UK until there is more clarity on our position in Europe, the strength of the pound, taxation and legislation. However, given that investment volumes are likely to plateau anyway (as returns fall), a Brexit would probably hasten a rise in UK property yields, at least until investors view this as a buying opportunity.

In the medium and long term, the majority of non-domestic investors are likely to remain active in the UK, as their buying choices are driven by the unique security of the UK lease and the strong performance of UK assets, which are largely independent of the UK’s position in the EU. Heightened uncertainty about the future of the EU itself post a UK departure may lead to lower deal volumes within the EU, but in the short term some top tier European markets will probably benefit from more investor demand. In the medium and long term, European investment volumes are likely to revert to normality, so long as the concept of the EU is not fundamentally damaged by a Brexit.