A clearing mist? On the ground responses to Brexit.
We wrote our first note about the impact of Brexit on economic development a few days after the referendum result. Our main message then was that we have entered uncertain times, and we made a few initial suggestions about how to respond to that uncertainty. After the initial shock and turmoil there is at least now some clarity on leadership of the country and response appears to be moving from emotional reaction to identifying the realities of what Brexit might mean. Over the last two weeks we have spoken to over twenty of our clients and contacts in both the private and public sectors to find out what they are doing right now, and how they will respond to Brexit in the coming weeks and months. We hope you find the views of those on the ground interesting and perhaps contrary to some media reporting.
The Property and Development Industry
The property industry has responded most quickly among those we have consulted, and the immediate impact of Brexit is mixed.
Whilst examples have been cited of some development projects being put on hold or timescales lengthened, the vast majority continue unaffected at this time. The sentiment amongst housebuilders is generally business as usual. Whilst their share prices suffered immediately, those focused on the domestic market are still confident about the demand for new homes and as a result little appears to have changed operationally. Nevertheless, there are concerns about the future labour supply in the construction industry if immigration becomes heavily restricted. In the commercial sector there is uncertainty following the suspension of a number of the big commercial property funds. However, our contacts involved in projects supported by those funds have not yet been notified of any change of circumstances and continue to advance schemes.
Whilst the outlook is uncertain, many people believe that the development industry is better able to weather the uncertainty than in 2008 having ‘put its house in order’ and there are no immediate fears about the availability of bank lending. Most people are waiting for the new prime minister to outline her plans, hoping that this will bring some confidence back to the economy. Clearly this is now happening more quickly than was anticipated removing one of the many layers of uncertainty.
Looking to the longer term there are also questions about environmental regulations, and their impact on development and regeneration schemes. Could a more laissez faire attitude replace the current approach, and what does this mean for development in the future? Will the Environmental Impact Assessment (EIA) process be retained? This is just one of many areas of complex regulation and law that will need to be disentangled as Brexit becomes a reality.
In the transactional market some deals have been completed since the referendum result, whilst others have been delayed or even abandoned. The market was already cautious in advance of the referendum, so the decline is not as marked as it might have been in a more buoyant market. With confidence slowly ebbing away, there is an expectation that deals may be harder to complete in the medium term.
Overseas investment is at risk as the UK pulls out of the EU, but many believe that the devaluation of sterling could make the UK more attractive. There is also talk of a lower rate of corporation tax. Perhaps these positive and negative trends will cancel each other out? This remains a time to ‘wait and see’ rather than for knee-jerk reactions.
Like the development and property industries, local authorities are seeing a mix of signals. Given that only three weeks have passed since the referendum, the result has had little tangible impact yet. However, we have heard of at least one local authority that sees this as a time for them to step up and take the lead in promoting development and regeneration projects. With prudential borrowing being relatively cheap, and the prospect of interest rates falling, some see this as a time for the public sector to become bolder.
There is a perceived risk to the plans of more pro-growth authorities, which were becoming more reliant on income streams such as new homes bonus and growth in business rates. A slowdown in the economy will affect these.
Many local authorities are currently preparing or reviewing their local plans, and they report that the referendum result could have an impact on these. The economic assumptions that underpin these plans are now less certain. There is talk of forecasters reducing the figures for future job growth. Evidence will be scrutinised closely, and many expect more challenges to future housing numbers, particularly from those opposed to new housing development.
LEPs are the custodians of strategic economic plans to promote economic growth and employment since the fallout from the last recession. They see this role as being ever more important as we enter a period of huge uncertainty, so they are pushing their existing local growth agendas harder.
However, there is a question mark over the future funding of local economic development. Many LEP supported projects rely on EU structural funds as well as UK Government funds. The former has a limited lifespan and the latter is uncertain, and will depend largely on future tax receipts and Government spending priorities. Our clients are clear that some clarity about the new Government and its spending priorities will be helpful.
EU Funding Programmes
In Wales and Cornwall in particular a lot of regeneration is dependent on EU funding, and the delivery of the rest of the current programmes remains uncertain. Will the UK Government step in and continue to support the historic structural funds programmes that have spent so much in Wales and Cornwall in the last decades? How will these areas fare in a future without EU structural funds? Will it create opportunities for alternative mechanisms free of broader EU programme regulations? For many of the most economically deprived parts of our nation the resolution to this uncertainty will remain one of the highest priorities and at present the air is filled with questions rather than answers.
Uncertainty continues. Some see positive signs and others see negative signs, but most are carrying on with ‘business as usual’ for the time being. Markets have fallen and risen, but the tangible impact on economic development on the ground is limited so far. Several of our contacts have raised the concern that we may ‘talk down’ the economy unnecessarily.
Until we have a new cabinet and Government with a plan for Brexit – which could be as early as the next few days – then the confidence needed to stimulate economic development will continue to slowly ebb away. We are continuing to monitor the situation, and would welcome your participation and input into our next briefing note later in the summer. To register interest and share your experiences please click here and as always please get in touch if you would like to discuss anything further.