With a month to go until the EU referendum, there are signs that property investors have growing concerns about the possible impact of a leave vote.
City law firm Nabarro said on Friday that commercial property investors were adding “Brexit clauses” to contracts that will allow them to pull out of deals if the UK votes to leave on 23 June.
Next week, a new phase of a luxury flat development in south London will go on the market with a “Brexit pledge” for worried buyers.
A poll of UK and global property investors with holdings worth £350bn found that more than two-thirds were pessimistic about the outlook for property values if the leave campaign wins, Nabarro said.
As a result, said senior partner Ciaran Carvalho, investors in commercial property, including office and shop developments, were taking precautions.
“We have seen a marked increase in the number of contracts which include clauses to protect the position of buyers investing in UK real estate ahead of the referendum,” he said.
Investors are paying deposits that they will get back if leave wins. “Brexit is a leap into the unknown,” Carvalho said. “Brexit clauses are a pragmatic, legal response to that uncertainty.”
Residential developer Oakmayne Properties is launching 42 apartments in Two Fifty One, a 41-storey building in the middle of the Elephant and Castle redevelopment in south London, at an event at the Shard.
Prices start at £655,000 for a one-bedroom flat and buyers who put down a £2,000 reservation fee will be able to get the money back if they are unhappy with the referendum result.
David Humbles, the Oakmayne managing director, said: “Buyers will not be required to exchange contracts until after the vote. If they don’t like the result, whichever way it goes, they will have the right to withdraw and have their reservation fee refunded in full.”
The move comes as commercial and residential property markets start to show jitters ahead of the vote. All sectors of the market are now affected.
Residential
The Office for National Statistics (ONS) reported on Tuesday a 2.5% rise in house prices in March, bringing the average cost of a home to £291,820.
However, the latest survey of estate agents by the Royal Institution of Chartered Surveyors (Rics) suggests that the mood has altered – partly as a result of the stamp duty changes that took effect in April and prompted landlords to bring forward purchases, and partly as a result of the forthcoming EU vote – although referendum effects are mostly focused on London.
George Osborne warned on Friday that in the case of a vote to leave the EU, values would take a hit of 10%-18% compared with values expected if the UK stays.
The government has also said mortgages would become more expensive following a Brexit, as interest rates are likely to rise.
Henry Pryor, a buying agent for wealthy clients, said the market had slowed markedly.
“Buyers don’t want to commit to something that could be cheaper on 24 June and sellers don’t feel inclined to take less for their home than their neighbour achieved six months ago. The result? Falling transactions, fuelling talk of plummeting prices,” he said.
Howard Archer, the chief UK economist at IHS Global Insight, said he expected the market to be quiet in the runup to 23 June.
“I think the market will be subdued until the referendum and will pick up after that if we vote to stay,” he said. “If we vote to leave, I am pretty pessimistic about the housing market ... there will be a shock and I think the market will stay pretty weak for some time after that.”
This is backed by ratings agency Moody’s, which said a Brexit vote would be good news for first-time buyers, particularly in London.
Gaby Trinkaus, a senior analyst at Moody’s, said: “First-time buyers would benefit from lower competition, as house price and rental inflation would slow down if immigration is curbed.”
One issue, however, could be labour in the construction market, with builders including Barratt warning that an end to free movement of workers could slow down the supply of new homes.
Commercial
Britain’s biggest listed property developer, Land Securities, responsible for the Walkie Talkie skyscraper in London and retail spaces such as Bluewater in Kent and Gunwharf Quays in Portsmouth, said this week it had sold more than £1bn of its assets because of growing risks to the UK market, including the chance of a Brexit vote.
Its chief executive, Rob Noel, said a leave vote would lead to “falling rental values and a reduction in construction commitments, particularly in London. An exit could be painful for the property industry and those it supports.”
The last last commercial property report from Rics found that demand for UK offices and shops from international companies had fallen since the referendum was announced, while a report from the Bank of England said there had already been a marked slowdown in commercial real estate investment deals in London.
Mat Oakley, the director of commercial research at Savills, said £13.5bn of commercial transactions took place in the first quarter of the year – down from £18.5bn in the first three months of 2015.
That is still way above the long-term average of £9.5bn, but he said: “There are certain buyers who aren’t moving at the moment. UK pension funds and insurance companies are less active and expected to remain so in the runup to the referendum. Other investors are seeing it as an opportunity though, particularly non-domestic investors.”
The impact of the referendum was mostly being felt in London, Oakley said, but a remain vote would probably prompt a new burst of activity: “I think we will have a ‘Brelief’ bounce.”
Property investment funds
In recent weeks, several of the UK’s biggest property investment funds have changed their pricing so investors who want to cash in their holdings will get a less lucrative deal.
The changes to commercial property funds run by Henderson, M&G and Standard Life mean those coming out of the fund receive about 5% less than under the old pricing structure, to discourage cashing out.
M&G said it was forecasting good returns from commercial property, but that the decision was “a reflection of current flows ... designed to ensure equitable treatment for transacting clients and those who remain invested”.