by James Roberts
While a hung Parliament is not the outcome that delivers the certainty markets usually prefer, there are actually advantages for the economy in the election result.
At the time of writing the Conservative Party looks set to remain the government of the UK, but without a majority in Parliament, and probably dependent upon the support of Democratic Unionist Party (DUP); a party from Northern Ireland. The BBC are reporting that Prime Minister May does not plan to resign, despite losing the Conservative majority in Parliament, although we will find out in the next few weeks whether there is a leadership challenge.
The business world would probably have preferred a straight Conservative majority, and in the next few days we should expect downwards pressure on the pound sterling, and volatility in the financial markets. However, there is actually an upside to the current election result from an economic and commercial property perspective.
Indeed, the current period of uncertainty, and sterling weakness, could present a limited window of opportunity for overseas property investors to buy in the UK, or for tenants to obtain business space on favourable terms. This window could be very brief, as we expect greater realisation of the advantages of the hung Parliament to spread as the summer progresses.
Soft Brexit on the rise
So what are the advantages?
First, the pendulum has swung against a Hard Brexit – a concept which, rightly or wrongly, causes concern among some in the market. The DUP, who will play a major role in supporting the Conservative government now, has mixed views on the EU. While opposed to outright membership, they are also against the idea of a ‘hard border’ between Northern and Southern Ireland.
Moreover, a Hard Brexit deal would certainly prompt a rebellion by pro-EU Conservative MPs, and some believe there are even hard line Brexiteer Tories who might vote against any deal with the EU. In short, even with DUP support, the Conservatives could need the support of other political parties to get the final Brexit deal through Parliament.
Consequently, the Brexit deal with the best chance of drawing broad support in the UK Parliament would be a moderate one. Nigel Farage, the former-leader of the pro-Brexit UKIP party, this morning in response to the interview question “are you worried that your type Brexit will not be delivered?” replied “Very”. Last night in a television interview, Brexit secretary David Davis said that if the Conservatives lost their majority, they would similarly lose their mandate to withdraw the UK from European single market and customs union.
Consensus politics returns
Secondly, a worrying trend of late has been the May government’s talk of increasing business regulation, as well as its failure to show public support for London’s financial cluster in the face of speculation that it might lose EU-related business. This was probably an attempt pre-election to appeal to Labour voters. Without a Parliamentary majority the government will have stick to relatively consensual, not controversial, economic and business policies. It will not be in a position to ignore important business lobbies like the banking industry.
Going forward, we would expect a return to middle-of-the-road economic policies, as these will be the easiest to push through Parliament. This will benefit both investment and occupier demand for commercial property, particularly in the office and industrial markets. A stronger defence of the London financial sector, should benefit the City and Canary Wharf office markets.
Thirdly, the swing against the Scottish Nationalist Party (SNP) confirms in numbers what many had stated anecdotally: that the idea of another referendum on independence is unpopular in Scotland. This raises the possibility of the idea being kicked into the long grass, ending what could have been a market dampener for Scottish commercial property.
The impact on UK commercial property
While the knee-jerk reaction to the news of a hung Parliament is likely to be concern, the direct property investment market will in our view see pricing remain stable. The slower transaction timescale for property, compared to equities or currencies, will allow time for the advantages of a hung Parliament to spread, and shape the market’s thinking.
Currently, the IPD all property capital value index for commercial property has been rising for the last seven months, and is just 1.6% below pre-referendum levels. This shows that the impact of the referendum amounted to a short and shallow correction for property prices. The General Election is far less of an issue for commercial property than Brexit. Therefore not only do we expect little or no impact on pricing, there should be upside further down the line via the realisation that Hard Brexit is receding as a likelihood and that the weaker pound has made the UK more attractive to overseas investors.
Industrial property has been the best performing commercial real estate sector of late. We continue to see this as a strong prospect, but that recent outperformance will limit the potential upside in the medium to long term. Office property has perhaps been unfairly tainted by the Brexit issue in the eyes of investors – occupier market statistics have in fact been remarkably steady since the referendum. Therefore we see offices as a good opportunity, particularly Central London offices, where there is a strong tech story in the occupier market.
Retail remains a sector where careful asset selection is necessary, but with pockets of opportunity, while alternative investments like healthcare property and hotels have the advantage of offering stability of income in uncertain times.
