Brexit - An Irish Real Estate Perspective

Back in 2016, I wrote a note 4 months after the initial Brexit referendum called ‘Impact of Brexit on the Irish Property Market’. In my opening paragraph I suggested the following: 

“Sentiment is that it is still too early to tell what the complete impact of Brexit will be. Britain is still a member of the European Union, and we still don’t know what type of exit package it is going to have.”

I’m not entirely sure if there is any further clarity on Brexit since I wrote the above, 30 months ago. Britain remains in the EU and we still don’t know for certain what type of Brexit deal will be finalised.

Where Are We Now?

Brexit is evolving at a daily rate. Even as I type this, something may have broken in Westminster by the time you come to read it. At 4pm on Monday 8th April, the latest development in negotiations is that, as of last week, Theresa May extended an offer to Jeremy Corbyn to include him more in Brexit discussions. This was an attempt by the Prime Minister to get the backing of the opposition to her proposals and therefore get a deal over the line through parliament. Some talks have already taken place between the two party leaders, and indeed more are expected.

In tandem with this, May then sought an extension to Article 50 on Friday (5th April) from the EU, looking for extra time until 30th June. They are expected to respond to this on 10th of April (2 days’ time), with suggestions that the EU appears to be thinking of something much longer.

Whilst both parties appear to agree that an extension is necessary, confidence of the EU in the UK for a quick resolution has been, not unfairly, tainted. Theresa May’s somewhat belated attempt to seek a cross-party consensus is a step in the right direction, but to outsiders, the path to a successful “meaningful vote” remains by no means a guarantee. The risk of a general election therefore still is a possibility.

The Economy

There are plenty of economic commentaries about the impact of Brexit, so I don’t want to go into too much detail on this in my property perspective note. That said, the economy is fundamental to property market performance, so one key point to draw on is around predictions that various Brexit scenarios will have on the Irish economy. The ESRI released research in December 2018 which suggests that Irish GDP could fall, but that it would still remain in positive territory. A ‘no-deal’ Brexit could cost the Irish economy approximately €4 billion in lost output compared with an orderly departure. This equates to 2.5% growth in a ‘no-deal’ scenario and 3% in a soft deal scenario for 2019 GDP. The ESRI’s baseline assumption is for economic growth at closer to 4% for the same period. 

This change in GDP will be driven by an impact on Irish imports and exports. In 2015, Irish exports to the UK accounted for 14% of total cross-border goods exports and 20 per cent of total service exports. In addition to Irish exports, the UK is also a key importing market, representing 26 per cent of total cross-border goods imports and 10 per cent of service imports.

It is still unclear how tariffs and borders will be impacted, but it does shake up a common labour market between the UK and Ireland, that has a long tradition before either had EU membership.

Irish Property Market Impact

The impact that Brexit will have on the Irish property market is varied. In one respect, any negative impacts to our economy are not positive from a real estate perspective. Whatever is agreed by the UK parliament and the EU, it is hoped that there will be minimal disruption for Ireland. This is largely dependent on the type of Brexit deal that is agreed, with a hard or a ‘no deal’ Brexit likely to cause the greatest level of upset. At this stage, a soft Brexit or indeed the potential for Brexit not to happen at all, would be the best two scenarios from an Irish property perspective.

Of greatest damage at the moment is the lack of certainty that it is creating, as property markets do not like uncertainty. This is causing stalling of decisions across the board, for investors and occupiers, regardless of the sector. The quicker there is a resolution, or indeed clarity on what is actually going to happen, the better. We expect property markets and sectors to be impacted by this uncertainty with continued caution and stalling in decision making processes until there is further clarity and more finality.

Hard Brexit? Hard Facts

Assuming the worse-case scenario, what does this mean for each of the commercial property sectors?

For some sectors, there may indeed be a short-term positive bounce in occupier markets in a post hard / ‘no-deal’ Brexit world. There have been rumours in press coverage of a mass exodus of office occupiers from London, with concerns around passporting for workers, and a requirement for the free movement of goods and people across the EU driving this demand. As the only remaining native English-speaking member of the EU and Eurozone, Ireland is well-positioned to benefit from this.

There have been a number of enquiries and indeed some deals for occupiers making a move to Dublin from the UK since the initial Brexit vote in June 2016. Whilst there have been reports in Dublin of large Brexit deals of 50,000 sq ft upwards, there has been limited large-scale activity to date. There are several companies who were already relocating or expanding and are now allocating 10-15% additional space for Brexit related roles.

In terms of sectors, the legal sector has experienced increased activity with a number of UK firms opening here, including Pinsent Masons, Simmons & Simmons, and DLA Piper. The Governor of the Central Bank has confirmed that they have received a significant increase in the number of UK financial services companies looking to register in Ireland. We are also seeing tech companies reconsider future planned growth from the UK to other cities, and Dublin ranks high as a potential relocation.

Dublin does still remain in competition however with other countries across Europe, most notably Frankfurt and Amsterdam where rents are lower and lease terms are shorter and therefore office much more flexibility. That said, in order to offer more flexibility, we have seen an increase in demand for flexible office space with providers reporting an increase in enquiries from UK-based firms.

From an industrial perspective, other cities that are located in continental Europe have a ‘logistical’ advantage (pardon the pun). There may be some increased demand however, particularly for some industrial occupiers who already have a presence here and can expand their operations. Tariffs on exporting goods into the EU would be driving this potential short-term increase in occupational demand for industrial space.

Whilst we may see some increase in enquiries and tenant activity, it is not at the scale reported, and indeed, the impact that Brexit could potentially have on the Irish economy would far out-weigh any short-term gains in demand. This activity is extending the strength we have seen in the recent cycle and is not creating a new surge of activity.

What is particularly interesting post-Brexit news however, is that the transfer of money and assets under management, and the leakage from London of these, has been quite significant in the last 24-months. In the longer-term, this is where we can expect to see additional job creation and wealth as a result of Brexit.

In addition to offices and industrial, Brexit is also impacting on the retail sector. Whilst retail activity in Ireland has proven to be more resilient than the UK market to date, we are still witnessing some caution amongst retailers in the Irish market, particularly those that have a strong UK presence. Key economic indicators that we use for measuring the retail market performance such as sentiment and spend are steady, but monthly fluctuations reveal some instability and sensitivity to external market factors. A reduction in sentiment which could occur in one of the less-good Brexit outcomes for Ireland, could impact consumer spend, and this would have a negative impact on the retail market. As of yet, the main impact on retail comes back to my point above around caution stalling decisions. This is slowing the market somewhat, but it not impacting activity significantly. Should there be any fundamental changes or shocks to the economy, the impact on these two consumer indicators will undoubtedly effect retailers, high streets and schemes across the country.

In addition to the three core commercial sectors, there are other sectors in property that could also be impacted. Most notably this includes Residential, and in particular new development whether it be in the form of new homes or PRS. Whilst the fundamentals would still stack up around strong demand and supply shortages, increasing construction costs caused by tariff hikes and border controls etc would ultimately impact on end values. This would impact construction activity across the board, not just residential. However, with margins already tight on residential schemes, this would create concern about viability of schemes against costs and affordability.

In addition to Residential, Hotels is another market that may be particularly exposed to a hard or ‘no-deal’ scenario. With over 35% of overseas tourists into Ireland coming from the UK, changes to ease of travel from a passport perspective could potentially be of concern. In addition, should any post-Brexit currency changes put the Sterling less favourably against the Euro, Ireland may become less attractive to UK residents for tourism travel.

Conclusion

Brexit is clouded by indecision, disagreements and a lack of clarity.

What we do know for certain, is that we still know nothing for certain. Whilst negotiations seem to be converging towards an agreement, more so than at any stage in the last (almost) 3 years, we are still some way-off knowing what exactly the impact of Brexit will be on Ireland’s economy and markets.

Assuming an agreement is achieved, firstly within the UK parliament and then with the EU, it will still take a number of years to work out the details and legal implications of legislation that will need to be enforced. This is all assuming that an agreement is indeed achieved, and in fact, a ‘no deal’ Brexit and a UK general election are still likely.

There is still a chance that there is a soft deal agreed between the UK and the EU. If this were to happen, we are of the view that there would be limited negative impact on Ireland’s economy and property markets. As part of this recent cycle, the Irish market is performing much more sustainably, and it has positioned itself in a way that it is cushioned to respond to market shocks.

From the outset of Brexit, I have used one phase: “expect the unexpected”, and even at this stage, I am continuing to adopt this mantra.

Hannah Dwyer, Director & Head of Research

[email protected]

www.jll.ie/research