At the heart of European integration has always been the belief that an ever-closer union would bring durable peace, economic strength and prosperity to all. In the real estate industry, tangible impacts can certainly be seen – from the emergence of super-sized logistics facilities serving multiple European markets, to the increased cross-border real estate investment activity on the back of the ‘single market.’ It can even be seen in the proliferation of tall and shiny office towers in major cities, fulfilling demand created by the deregulation of financial services. In short, cross-border and multinational demand has been created, but if a vote to leave prevails, which markets will be on the winning side – and which will be on the losing?
In the event that the UK votes to exit the union, we would certainly expect some of these cross-border functions to be re-assessed, albeit only slowly over time. Ultimately, the attractiveness of a country as business location is what determines occupier demand and, consequently, future rental growth prospects. The most significant short-term real estate impact would be felt in the UK’s largest trading partners, particularly those that are geographically closest to the UK, with gravity models suggesting that both market size and distance play a fundamental role in determining the amount of trade between two countries.
As such, we see the biggest impact from Brexit occurring in France, Germany, the Netherlands and Ireland. Broadly speaking, locations with significant net exports to the UK will likely see some drop-off in trade with the UK, mainly during the period when new trade agreements are being established and uncertainty dominates.
Although the impact from Brexit on the services sector would be uneven, we would expect EU locations with a significant financial and business services sector to pick up activity from London due to MiFID and the inability for non-EU states to benefit from bank “passporting” rights. At face value, Dublin looks well placed to benefit at London’s expense, with attractive rates of corporate taxation and strong links with the US. However, by international standards, Dublin is a relatively small market, with its office stock being less than one sixth of the size of London’s stock. Only Paris and Frankfurt are both of sufficient size and with deep-enough labour pools to offer viable alternatives to London – albeit an inflexible labour market among watered-down reforms may affect the attractiveness of Paris. In addition, Amsterdam offers a feasible alternative, with a healthy existing financial services sector, a highly educated workforce and great connectivity. With all of this in mind, we estimate that these cities would be the main office market beneficiaries of a future Brexit.
It is also worth noting that a wider and more fundamental concern in the eventuality of a Brexit would be the future of the European Union itself: would the departure of the UK set a precedent for other member states? Across Europe, the rising popularity of extreme political parties tapping into concerns over increased immigration are prompting greater anti-EU sentiment and threatening future stability. Should the withdrawal of the EU’s third largest market by population turn out to be a success, then nations that have also expressed anti-EU sentiment – such as Denmark, Poland, Hungary, Slovakia and the Czech Republic – may also feel pressure to renegotiate their relationship with the EU and may also even vote to leave, a potential contagion effect of Brexit. A prolonged period of increased political risk is not healthy for investment in any country and would likely lead to more losers than winners in the event that such an, albeit unlikely, scenario were to prevail.
MiFID is the Markets in Financial Instruments Directive from the European Commission which aims to reduce systemic risk and strengthen financial stability. Part of this is through changes to third-country (non-EU) access to EU markets.
Follow the links to read our other Brexit posts: The Waiting Game, The Brexit Hokey Cokey and Brexit: Is it a case of the good, the bad or potentially even the ugly?
Mark Unsworth is a Senior Forecast Consultant in Cushman & Wakefield’s EMEA Research team and is based in London. He has been a real estate researcher for over 12 years, focusing on the relationship between macroeconomics, financial markets and European real estate. At Cushman & Wakefield, Mark is responsible for the European forecasting output and regularly contributes to thought leadership insights, market updates, consultancy projects and individual client presentations.