June 28, 2016
On 23 June 2016, the United Kingdom (UK) voted to leave the European Union (EU). While the processes and timescale for the country’s withdrawal are still uncertain, the move will have numerous implications for economies and real estate markets in Asia Pacific. CBRE Research has identified the following major impacts:
Economy: Greater uncertainty, but fundamentals remain solid in Asia Pacific
- The referendum result will probably lead to weaker economic growth in the UK and EU over the next two to three years, which will generally have a negative impact on exports from Asia. Markets of particular concern include Japan, as the Yen is more expensive; China, as the EU and UK are major trading partners; and South East Asia. However, the macro-economic environment in Asia Pacific remains solid, thanks to the region’s strong internal growth drivers.
- Free Trade Agreements (FTAs) currently under negotiation between Asian countries and the UK and EU will likely be put on hold. India has been negotiating an FTA with the EU for some time, with the UK as a key negotiator.
- The political fallout from Brexit has drawn increased attention to other potential geopolitical risks in the coming months. The Federal election in Australia in July; legislative council election in Hong Kong in September (followed by the Chief Executive election next year); and the U.S. Presidential election in November will all be keenly watched.
Occupiers: Lengthier decision-making
- While some sectors and businesses are likely to be negatively affected by the Brexit, the drivers of office occupier demand in Asia Pacific should remain unchanged, and will continue to be led by Asia-based service companies and cost-saving moves. The overall impact of the Brexit on Asia Pacific occupier markets is therefore expected to be limited.
- However, multinationals, particularly those headquartered in the EU, are expected to adopt a more cautious stance towards major strategic corporate real estate moves in this region in the short term. With currency volatility expected to continue, Asia Pacific is likely to be expensive for European multinationals.
- Among Asian companies, those that have operations in the EU could face some challenges, including lower revenues in domestic currency terms following the fall in the value of the sterling. They may therefore be less active in leasing space in their home countries.
Investors: Focus on flight-to-safety
- The financial market volatility following the Brexit will have a negative short term impact on investor confidence. Some investors are likely to adopt a wait-and-see attitude and delay investment decisions. However, activity will gradually recover when order in the financial markets is restored.
- In the medium term, institutional investors will search for safe havens where they can park their money. Core investments in mature markets will continue to dominate. It is important to note that despite the vote, the UK still has many attractive investment characteristics including diversification; different currency; time zone; language; rule of law; long leases and attractive lease structure; and highly liquid and transparent investment markets. It is also currently around 10% cheaper than it was. The London market will therefore continue to look attractive to many investors.
- Australia was identified as the most attractive market in Asia Pacific in CBRE’s 2016 Investor Intentions Survey, and will remain so. However, the entry price for foreign investors in Japan has risen, along with the stronger Yen. Core assets in mature markets such as Hong Kong and Singapore will remain sought-after by international investors.
- As CBRE Research stated in its 2016 Asia Pacific Real Estate Market Outlook published in February of this year, investors should focus on NOI growth while acquiring assets in the region.
Asian investment in the UK: A more cautious approach
- In the short term, Asian investors will be more wary of investing in UK real estate. However, the UK, particularly London, will remain attractive to Asian investors.
- The long-term leases, particularly in the office sector, will also ensure the market remains especially attractive to Asian institutional investors.
- A decline in the value of the Sterling could act as a catalyst for increased foreign investment in the UK as Asian investors seek more attractive returns compared to their home markets.
Foreign investment in Asia Pacific: No changes expected
- Investors in Asia are not expected to significantly alter their plans in the short term as their investment strategies are already well established.
- European investors will face higher pricing in Asia Pacific because of currency movements. However, many such investors are already net sellers in the region.
- Cross-border investment in Asia Pacific is largely driven by capital from within the region, along with new entrants from the Middle East. Therefore, CBRE Research does not expect Brexit to have a strong impact on inbound investment.
Table 1: Key impacts of Brexit on major Asia Pacific markets