News agency Reuters recently reported that some commercial property investors have added contractual clauses permitting buyers to void purchases if the UK votes to leave the EU. What are the market implications of these so-called Brexit clauses?
Transactions in decline
Bank of England figures show a 40% decrease in UK commercial property transactions during Q1 2016. Reuters’ sources believe the decline is caused by the reluctance of buyers and sellers to conclude deals until after the EU referendum is held on 23 June 2016.
Amidst the uncertainty, some parties have completed deals, albeit with measures to protect against a leave vote. Paul Firth, National Head of the Real Estate Group at law firm Irwin Mitchell, told Reuters that Brexit clauses had been included or requested in the firm’s commercial property deals valued within the £10 million to £80 million range.
In its investigation, Reuters spoke to 24 firms spanning law, brokerage and commercial property. Half confirmed they had added Brexit clauses, completed a deal with such a clause or been asked to include them at least once.
Market concerns for leaving
Mr Firth also addressed investor worries, explaining: “[They] fear that the value and return on investment properties may decline and that it may not be as good an investment if Britain withdraws from the EU.” Andrew Friend, Fund Manager at Henderson Global Investors, highlighted that Brexit clauses are most common in “higher value deals” and those involving “financial office space in London”.
Land Securities, which is credited as the UK’s largest property developer, claims to have sold more than £1 billion of assets to protect against mounting uncertainty in the UK market – including the risk of a vote to leave. Land Securities' Chief Executive Robert Noel said: “An exit could be painful for the property industry and those it supports.”
Based on Reuters’ findings, a leave vote will result in some high value deals being cancelled, causing further uncertainty. Consequently, some commercial property owners might have to refrain from selling if prices decline. If conditions do become more challenging, landlords should focus on maintaining their cash flow. An effective way to do this is with the ethical and professional measures provided by Dukes to limit commercial rent arrears.