Brexit: the politics

The historic defeat of prime minister Theresa May’s Brexit plan earlier this month informs the political and economic trajectory, which in turn have implications for UK property occupier markets and investment activity. This week, we will consider each in turn.

1. Politics

The probability of an extension to Article 50, which requires unanimous consent from the other 27 member states, has increased. While Downing Street has not conceded this, chancellor Philip Hammond and Andrea Leadsom, leader of the Commons, have both intimated the possibility. However, this will require the UK offering a good reason for the extension from Europe’s perspective. One scenario which may find support in Europe is time to hold a People’s Vote.

An Article 50 extension scenario – dubbed by some ‘fudge and delay’ –could lead to a softer Brexit and even a second referendum. While protracted uncertainty will weigh down the UK economy and investor sentiment, including the outlook for rental growth, the prevention of a disorderly ‘cliff edge’ exit from the European Union would stave off a materially lower growth and a potential liquidity crisis.

UK Parliament will vote on Mrs May’s “Plan B” on Tuesday, which is essentially Plan A with the promise of yet further attempts to renegotiate the contentious Northern Ireland backstop. In addition, as many as 14 amendments to her deal have now emerged – running a spectrum of scenarios and with differing degrees of MP support – which will also be debated tomorrow.

Whichever proposals emerge successful after Tuesday’s parliamentary debate, the rising influence of parliament in the final Brexit deal reduces the probability of a no deal which is good news for property markets. However, this is in contrast to the most popular opinion among Tory grassroots members. A survey by Conservative Home found 48% want no deal, while 24% want a Canada-style solution and just 10% back Mrs May’s current plan. The political gap between Tory grassroots and the prime minster’s current trajectory underscores the need for a cross-party consensus.

In a scenario envisaged by the Bank of England, a worst-case disorderly exit – where the UK leaves the EU with no agreement and no transition period – could lead to a peak-to-trough collapse in UK commercial property pricesby 48%, more precipitous than the 42% slump during the global financial crisis a decade ago. Residential property prices would slump by 30%. However, this is a theoretical stress-tested worst-case scenario, not a forecast.