A UK vote to leave the European Union (EU) could damage the country’s real estate market, according to a report by BlackRock.
The asset manager is already forecasting a cyclical downturn for 2017, but a vote to leave the EU trading bloc could worsen this effect, according to Mark Long, a researcher on the real estate team. The UK population will vote on June 23 whether to remain in the EU.
“It stands to reason at least some foreign investors have predicated their UK investments on access to the European single market.”“Property markets are not known for effective pricing of political risk,” the asset manager warned in a wide-ranging report into the effects of ‘Brexit’. “If Brexit actually were to happen, we could see occupiers deferring leasing decisions. The longer the subsequent period of political uncertainty would drag on, the more damaging it could be.”
London accounted for nearly a quarter (23%) of European cross-border commercial property investments in the past five years, according to Real Capital Analytics. In addition, the capital hosted 58% of Asian investors’ transactions in the same period.
The growing uncertainty surrounding the UK’s membership of the EU could cause investors to defer new transactions, BlackRock said.
“The bad news is that foreign investors are a fickle bunch—and it stands to reason at least some of them have predicated their UK investments on access to the single market,” the asset manager said.
The effect on the financial services sector was also a “key risk” for London’s property market, BlackRock warned, as some companies could reconsider the location of their main offices. Financial groups have a 25% share of the city’s leasing market, and has often “come to the rescue whenever the London office market has wrestled with excess capacity,” BlackRock said.
However, some of the key drivers of interest in London and UK real estate were unlikely to be affected by the referendum’s outcome, the asset manager claimed.
Perry Noble, partner in Hermes Investment Management’s infrastructure team, admitted that his team were “fearful of extended disruption to the UK market.” However, he emphasized that the demand from large pensions and sovereign wealth funds was “not going away because of Brexit.”
Authorities in both the UK and EU would work to “avoid disrupting the deep economic and financial integration” between the two entities, according to a statement from Fitch Ratings. Such an agreement would “limit the long-term economic cost” and ensure Brexit was only “moderately negative,” the credit rating agency said.
Related: ‘Brexit’ Fears Mount for Asset Managers & Private Debt Key as UK Investors Turn Cautious