Brexit Update: That Hard?

November 27, 2018

There has been a contradiction observed in the property market; while real wages have been increasing, property prices have continued to descend. This is a clear signal of uncertainty in the markets, which is largely spurred by the ongoing Brexit negotiations. A ‘hard’ Brexit scenario is likely to result in project fear and deteriorating financing options.

Recent reports claim that UK wages excluding bonuses have experienced the biggest rise since the end of 2008, increasing by 3.2% compared to the previous year. Faster wage growth, coupled with the UK inflation rate remaining steady at 2.4% in October, is a double win for British workers, resulting in real earnings picking up noticeably in the last few months.

Greater earnings should be beneficial for the British economy, as they are directly related to increased levels of spending by the population. However, there has been some contradictory evidence observed in the real estate market. With growth in private rents slowing since the beginning of 2016 and UK house prices dropping at the fastest pace for almost six months in September, there is a noticeable mismatch between real wage growth and the current property price trend.

The Brexit-infused uncertainty is likely to continue destabilising the UK real estate market, leading to outcomes that go against economic predictions and expectations. Despite a number of ministers resigning, fears of a no-confidence vote, and the subsequent plunge in the pound, as well as in shares of UK banks, retailers and house-builders, Theresa May vowed to sign off and deliver the Brexit deal. Unless the draft deal gains more support in the parliament, the current state of affairs suggests that the country is facing a higher chance of a “hard” Brexit scenario. The current withdrawal agreement offers the prospect of a smooth path toward Brexit and is seen as “very positive for businesses”, as it includes a 21-month transition period, during which time the UK will negotiate new trade terms with the EU and is able to indefinitely extend the transition period.

There are two major issues associated with a ‘hard’ Brexit scenario. Firstly, increased and prolonged uncertainty looming over markets is likely to provoke project fear among investors and developers, who may become weary of the future property price landscape. Secondly, this uncertainty is likely to significantly reduce the willingness of both domestic and foreign finance providers to supply capital for new developments. With increased risk-aversion and a lack of financing available on the market, obtaining loans in the future may turn out to be an incredibly expensive activity.

Developers should consider bringing forward any prospective financing decisions, in order to secure a lower price for their loan and reduce any risk of putting postponing or pausing a project due to the lack of capital. Consequently, we recommend acting now, as the UK is currently enjoying a thriving lending environment, with numerous different players providing cheaper capital and choosing not to impose stringent lending criteria.