Hung parliament spells renewed turbulence for UK

REFIRE's senior reporter Sara Seddon-Kilbinger looks at the outcome of last week's UK General Election, and assesses its likely impact on real estate.

The UK property market is facing renewed turbulence as the result of the remarkable general election result last week (9 June), which has left the country facing a hung parliament.

A hung parliament is likely to complicate Brexit negotiations and could also harm investor confidence in the UK which, in turn, could ricochet out to property markets, analysts say.

‘We are opening the ‘trapdoor’ in a highly charged political year,’ said Neil Williams, group chief economist at asset manager Hermes Investment Management in London. ‘The Brexit road was always going to be long, but a hung parliament puts in place an additional speed bump.’

A lot now hinges on how the UK economy performs over the next 6 to 12 months, according to Gunnar Herm, head of real estate research and strategy at UBS in Frankfurt. ‘The normal reaction at a time like this is that illquid asset classes, like property, become less liquid. However, in recent months, non-European investors have started to realize that they should look at other real estate markets outside the UK. They feel more pressure to familiarize themselves with other markets. I think this will be a permanent change.’

Despite winning 42% of votes, the Conservative Party’s calamitous and chaotic election campaign helped deliver an unexpected flurry of votes for Jeremy Corbyn’s Labour Party as younger voters turned out in droves, giving Labour 40% of votes. However, as both major parties fell short of the 326 seat majority needed, the UK is now facing a hung parliament. This is something of an anomaly in Britain, occurring just twice in recent years – in 2010 and 1974.

Any dithering on the part of the UK government could work to continental Europe’s advantage: ‘If the time forming a new government is prolonged, the uncertainty it creates will benefit continental European markets like France and Germany and make them more attractive,’ said Rob Wilkinson, CEO of AEW Europe. ‘The election result will impact on our short-term investment. It’s not good for the UK or for Europe and it’s messy,’ he added.

Investors exercise increased caution

Ongoing political certainty in the UK will likely result in increased volatility going forward as well as heightened investor caution, according to Stefan Aumann, a managing partner at European real estate private equity group Peakside Capital. ‘A lot of US investors regard investment in the UK as a proxy for investment in continental Europe but now that could change,’ he warned.

For now, many investors remain on the sidelines. ‘Some UK institutions have been sitting on the sidelines since the referendum last year,’ said Joe Valente, head of European research and strategy at JP Morgan in London. ‘Dutch investors have also raised concerns and have shown a reluctance to want to invest in the UK over the next 18 months.’

US investors, some of whom can be easily rattled, might also exercise renewed caution.

‘It’ll be fascinating to see how the UK election result impacts on the investment community. I’m speaking to US investors today and will be over there next week,’ said Wilkinson of AEW Europe. ‘US investors were slightly rattled by Brexit and elections in Europe. The Dutch and French elections calmed them down a bit. However, after an election result like this, it’s quite possible that some US – and even Asian – investors will sit back until the picture clears. It’s hard to see how they wouldn’t.’

One investor waiting it out is US investment management group, Barings Real Estate. ‘We are more careful doing deals in the UK,’ said Christoph Wittkop, managing director und country head, Germany, at Barings Real Estate in Hamburg. ‘Most of the investment we did in the UK was prior to the Brexit vote.’

AEW Europe is also being careful, Wilkinson said: ‘We will do what many other investors will do. Unless it’s a compelling deal in the south east of the UK, we will put it on watch for now.’

Coalition government remains an anomaly in UK

While coalition governments have long been the norm in Germany, the UK has little experience of them, a problem that will be compounded by the fact that the Conservative and Labour parties have diametrically opposed positions on how to handle Brexit. UK Prime Minister Theresa May, who, for now, is defying clamours to step down, has already visited the Queen to seek permission to form a government after agreeing terms with Northern Ireland’s Democratic Unionist Party (DUP). MPs will have to hold a vote of confidence in the newly-formed government, although that is not expected to happen before 19 June.

However, analysts are sceptical that May has made the right decision. ‘The DUP deal is just not sustainable, particularly when you take it into account that Brexit negotiations are about to start,’ Zachary Gauge, a European real estate analyst at UBS in London, told REFIRE. ‘This election has shown that the country is divided on both political and Brexit referendum lines.’

There had been some speculation that Jeremy Corbyn would try to form a rainbow coalition with parties including the Lib Dems and the SNP, although this was widely considered to be an improbable scenario.

European politicians were quick to reiterate that although the start of Brexit negotiations could now be delayed because of the election result, the date by which the talks must be concluded remains unchanged. Donald Tusk, the European Council president, tweeted: ‘We don’t know when Brexit talks start but we know when they must end. Do your best to avoid a ‘no deal’ as a result of ‘no negotiations’.

The best quote, however, surely comes from Guy Verhofstadt, the European parliament’s Brexit representative, who described the result as ‘yet another own goal – after Cameron, now May...I thought surrealism was a Belgian invention’.