At the moment Brexit appears to have been forgotten by many. This is understandable – the impact of COVID-19 is so immediate, vast and deep that the economic impact of Brexit seems distant and trivial by comparison. However, as real estate investors, landlords and tenants adapt and restructure their businesses they need to factor in the risks of Brexit to ensure they have a robust business plan going forward which isn’t undone by a no-deal Brexit.
The UK government’s current position is that the EU transition period will not be extended beyond the end of 2020, no matter what the circumstances. They have therefore asked businesses to plan accordingly. Many are not taking this threat seriously assuming the government will not want to compound the current crisis by having a disorderly no-deal exit from the EU. The market is assuming that a deal will be done or the transition period extended until the end of 2021.
However, there is a real possibility that a pro-Brexit government will make good on its threat, especially as it now has greater political freedom to intervene and support private businesses. The UK government is also keen to get on and conclude independent trade deals with non-EU countries and any extension to the transition period may place such deals at risk. Many in the UK government are keen to use Brexit to fundamentally restructure the UK economy; these plans now include building resilience to pandemics by controlling borders and shoring up key local industries.
Those in the real estate industry should therefore be mindful of the following in the event of a no-deal Brexit:
- Rents – Factoring a no-deal Brexit into any current restructuring discussions landlords are having with tenants. Landlords negotiating rent concessions that fall away when a tenant reaches pre-pandemic profitability levels may want to consider if such levels will take longer to achieve because of Brexit. If you are a tenant, are robust rent concessions and grace periods from payment obligations being negotiated?
- Liquidity – There could be a tightening of liquidity as financial regulations become disrupted. Companies are expected to emerge from COVID-19 carrying unprecedented levels of debt on their balance sheets and refinancing this may encounter unexpected hurdles.
- Construction work – The government is on the lookout for “shovel ready” construction projects that can be delivered in the next 18 months. There may therefore be a spike in demand for construction labour and supplies which may get compounded by shortages of labour and supplies because of Brexit and border controls. It is estimated that 15% of the construction industry’s workforce is made up of foreign employees (who after Brexit may need to fill in a Tier 2 Visa application, which is a costly and lengthy process) and 62% of the UK’s building materials are imported from the EU.
- The workforce – Hospitality, leisure and retail sectors also rely heavily on EU migrant labour and it is unclear how these sectors will be impacted. Any labour shortages from Brexit may get offset by such businesses being able to recruit employees who have become unemployed as a result of COVID-19. Much will depend on the pace of recovery in these sectors and if the local workforce will be willing to step in and take on jobs in these sectors. The recent “fantastic response” to the “Pick for Britain” initiative suggests room for cautious optimism.
- Demand – In the student accommodation sector, a significant drop in international students because of COVID-19 could be compounded by a no-deal Brexit. Similarly, a no-deal Brexit could accelerate the plans of office tenants to decentralise and move away from high cost offices.
- Wary customers – The British economy depends on the consumer and a no-deal Brexit might further dampen consumer confidence. A projected rapid recovery as lockdown eases towards the end of this year and in 2021 may get derailed and turn into a “W” shaped recovery.
- Uncertainty in decision making – The time and resources rightly being dedicated to the COVID-19 response have been diverted away from Brexit planning at an institutional and regulatory level. For the planning and development industry – in addition to the practical implications set out above – this is likely to lead to significant uncertainty in decision making and forward planning at a national and local level.
For example, much of our planning and environmental law framework derives from EU law and is ultimately enforced at a European level. Although a new Office for Environmental Protection is proposed in the Environment Bill, it’s now unlikely that the watchdog will be ready to step up to the plate until well into 2021.
At a local level, local planning authorities drawing up plans are grappling with the dual uncertainty brought about by COVID-19 and Brexit and how best to predict housing need. Housing need is a dark art at the best of times let alone in the current context.
In the midst of chaos, however, there is also opportunity, and any decision making uncertainty may well open doors for those in the development industry who are able to take longer term, strategic view.
There is a considerable amount of Brexit fatigue and everyone’s attention and energies quite rightly are focused on COVID-19, but now is the time to start paying Brexit some attention, or even best laid recovery plans could easily become unstuck.