Funds and Indirect Real Estate: The Impact of Brexit

United Kingdom

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and Implications

The biggest hurdle to understanding the impact of a Brexit is that there is little agreement as to its effect. If a Brexit was to occur, aside from a financial regulatory perspective, the legal implications for the indirect real estate sector ought not to be extensive if the governing documentation is subject to the laws of England and Wales. Political and economic ramifications apart, there are aspects of EU law that touch real estate investment in the UK, such as environmental and planning law. The allure of the UK may be affected if the existing legal position changes in relation to these areas.

Of greater concern is the response to Brexit of overseas investors. Between September 2014 and August 2015, 50% of investment purchases of UK commercial property were from overseas investors . How these investors respond will be critical. Will the UK real estate market and London and the South East in particular continue to be a popular investment jurisdiction for overseas investors? In the run up to the referendum, it is possible that the uncertainty generated will cause a rush to complete deals followed by a period of pause as investors wait for the certainty they crave to be re-established.

Britain adrift?

A fundamental worry is that Britain will no longer be the gateway into Europe, with the ambiguity surrounding the future of trading relationships causing wariness in prospective overseas investors. The ease of free movement and the beneficial treatment under EU legislation such as the Parent-Subsidiary Directive will be lost and Britain will need to negotiate new agreements. This will not only take time and money but there are no guarantees as to outcome. There is also concern that a Brexit could cause a second Scottish referendum, with the vote in favour of independence. As well as further economic uncertainty, this could directly impact upon the use of Scottish Limited Partnerships within fund structures.

Removed from the EU, European headquarters of non-EU firms would potentially relocate in order to guarantee business continuity. If this were to happen Britain is at risk of not only losing its status as a financial centre but a fall in office occupancy could reduce property development opportunities.

Britain as a safe haven?

Should a Brexit occur it will have a destabilising effect upon the EU who will have to adapt to having diminished diplomatic influence and countries potentially reconsidering the terms of their membership. In response the Euro's exchange rate appreciation may reverse and the pound may conversely be considered a safe haven currency for investors. In the event of a Brexit, Britain could take advantage of being free from EU red tape and develop policies which would not only restore any loss of competitiveness but also enhance its appeal to foreign investors.

Regardless of the reverberations a Brexit may cause within the EU, Britain will retain characteristics attractive to overseas investors, with a property market whose scale and liquidity is difficult to match elsewhere. These features, namely language, time zone, investment support services and a strong legal and political framework mean that Britain is likely to remain an attractive investment destination.

What next?

Whether Britain leaves the EU or not the only guarantee at present is that there will be a period of market uncertainty. Businesses are currently adopting a "wait and see" approach to the referendum and the wariness and risk attached to investments is growing. However, given the size and strength of the British economy and London's position as a global financial heavyweight, the hope is that if there was a Brexit, Britain would adapt and retain its appeal to overseas investors accordingly.