The Brexit White Paper and the Real Estate sector

08.08.18

On 12 July 2018 the UK Government published its long-awaited White Paper on “The Future Relationship between the United Kingdom and the European Union”, which, according to the foreword from the new Secretary of State for Exiting the EU, Dominic Raab, is “a vision that respects the result of the referendum and delivers a principled and practical Brexit.” The paper is intended as a blueprint for further negotiations with Brussels, though the reception it has received both domestically and in the EU suggests that any final deal will almost certainly be different from the content of the White Paper. However, the degree of continued harmonisation with the EU that is set out in the paper is probably now the minimum that can be expected from any deal.

Although the White Paper does not expressly cover real estate, there are key issues that directly impact the sector.

Free trade of goods and restrictions on services

One of the White Paper’s main features is the proposed free trade area for goods between the UK and the EU. The UK Government’s suggestion is that it would implement and commit by treaty to continuously harmonise the “common rulebook” on goods (meaning the EU “rulebook” covering matters such as product standards) in order to ensure frictionless borders, in particular between Northern Ireland and the Republic of Ireland and to protect UK-EU trade relations. A continuing single market in goods would offer some potential benefits for the real estate sector. For example, it would limit the impact of Brexit on the availability and cost of building materials, and ensure those materials continued to comply with current EU standards. In terms of industrial occupiers trading goods with the European continent, the proposed arrangements would be a factor in assessing future need for warehouses and showrooms etc.

The paper does not propose to maintain the single market in services but, in order to mitigate the impact on the cross-border provision of services (including financial and professional services), it does propose an arrangement on services with “broad coverage, ensuring that service suppliers and investors are allowed to operate in a broad number of sectors without encountering unjustified barriers or discrimination unless otherwise agreed.” The paper proposes that this arrangement would build upon the existing WTO General Agreement on Trade in Services (GATS) frameworks for global services trade, though does not provide more detail on how to achieve that.

European banks and financial institutions are actively involved in providing debt funding in connection with UK-based real estate development and investment transactions. Further discussion on the impact of the White Paper on the financial services sector is available here.

Immigration – a new “framework for mobility”

The White Paper sets out UK Government proposals for a new “framework for mobility” regulating UK-EU migration. More detail on those proposals is available here. The focus is principally on movement for the provision of services and temporary business activity, workers moving within cross-border businesses, and travel for tourists, students and young people. It does not seem to envisage any special arrangements for the cross-border movement likely to be of most interest to the real estate industry, such as the ability to recruit lower-skilled and possibly temporary EU workers for the construction and hospitality sectors. At the moment it looks as though such arrangements will be left to be decided as part of a unilateral UK immigration policy rather than on a reciprocal basis with the EU.

The post-Brexit future of Real Estate

While the issues noted above are of course important, the sector's principal interest at the moment seems to be in the potential impact of Brexit on the wider UK economy and the related demand for different types of asset. For example, will the aspirations for a “youth mobility scheme” allow the UK to continue to attract a steady flow of EU students, and so maintain demand for real estate assets in the further education, higher education and student accommodation sectors? Will restrictions on the free movement of services have an impact on future office demand, especially in London? If the UK economy is adversely impacted, how would the real estate sector respond?

Outlook

The overall feeling of stakeholders in the real estate sector seems to be that the White Paper left most questions unanswered (see this statement from the British Property Federation). However, while there are certainly many further questions to be asked and debates to be had before there is anything approaching clarity on what Brexit might look like, the White Paper does at least shed some light on the UK Government’s position in certain key areas for the real estate sector.