Brexit and the Gulf real estate sector

The law of unintended consequences:

Brexit and the Gulf real estate sector

JULIAN ROCHE

CHIEF ECONOMIST

Brexit: unfinished business

‘

The law of unintended consequences, often cited but rarely defined, is that actions of people—and especially of government—always have effects that 1 are unanticipated or unintended’

Most of the economic interest surrounding Brexit has been focused on the impact it will have on the UK’s own real estate market, including from Gulf investors. Academic analysis has always been clear about the factors involved, even if countries other than the UK were in mind when risk matrices for real estate were first mooted over a decade ago. Stephen Lee, for example, constructed a Real Estate Potential (REP) index2 which he argued determines the investment potential of international markets. The index was constructed using four key variables (1) country’s expected growth, (2) country risk, (3) transparency, and (4) real estate market specific risk. By any of these four measures, Brexit has decreased the UK’s REP: growth is down below pre-Brexit levels, while risk has risen. The idea of investing in London in order to avoid political risk in particular, as some international real estate advisers maintained even in the immediate aftermath of Brexit3, now seems, from the vantage point of two years later, unfortunately over-optimistic, while the days when Gulf investors formed up to 20% of investors in upmarket London districts seem already far distant. But has, and will, Brexit have an impact outside the UK, and to what extent? In particular, will it have any, rather unintended, impacts on Gulf real estate markets? Or is it – as many in the UAE perhaps believe – a case of a faraway problem with which Gulf governments and local investors need have no concern?

As this paper goes to press, the actual outcome of Brexit remains tantalisingly uncertain. The likely outcomes remain still as varied as no deal, a variant of the Malthouse Compromise or the UK Government’s own deal, or a postponement of Article 50 and no Brexit at all. A good time, therefore, to focus attention on the results of the UK leaving the EU, including where relevant, the effects of specific types of exit, and to have in mind a comparison with continued UK membership of the EU.

1 Norton, R. (2019) Unintended Consequences. Available at: https://www.econlib.org/library/Enc/UnintendedConsequences.html 2 Lee,

S. (2005) Gauging the Investment Potential of International Real Estate Markets. A Paper Presented at the Annual European Real Estate Society Meeting (ERES) Dublin, Ireland. Available at: http://centaur.reading.ac.uk/20959/1/1905.pdf retrieved 10 February 2019 3 Kharpal, A. (2017) London will remain the property ‘safe haven’ with more foreign buyers coming in 2017, top real estate CEO says. CNBC 20 January 2017.

Available at: https://www.cnbc.com/2017/01/20/london-will-remain-the-property-safe-haven-top-real-estate-ceo-says.html retrieved 10 February 2019

Macroeconomics: Brexit and the global economy in the short term The first impact does not depend on the eventual Brexit outcome and is being already felt throughout the global market. While admittedly just having slipped to sixth place behind India, the UK economy is still a USD 2.6 trillion-sized market4, highly integrated with global trade in both manufactured goods and services. Deciphering economic modelling by the International Monetary Fund (IMF5), which as the Financial Times pointed out last year6, and by its own admission is probably better at explaining the past than forecasting the future, suggests that Brexit – the debate and the uncertainty surrounding the future trading and economic relationship between the UK and the rest of the world – played a central role in lopping 0.1% off global growth each year for the past three years, quite possibly increasing that impact this year in the event of a no-deal as financial institutions are disrupted and some relocate out of the UK. Just over 0.3% over three years may not sound much, but in a year where the IMF projection for global growth is 3.7% and the UN’s, about 3%7, it is significant, even though population growth remains comfortably under this level at around 1.07%8 and falling.

From a trade perspective, Schroders took the view in 2016 that ‘emerging economies are likely to be relatively less impacted than developed markets due to strong trade with each other and domestic demand support’9. But for an open economy such as the UAE, for primary commodity exporters such as Saudi Arabia, and for developing economies such as Egypt, that are heavily dependent on global economic growth, the way in which Brexit has weighed down global markets is of concern. The UK is a prime trading partner of the Gulf. As UK economic growth slows in the short-term as a result of Brexit, there can only be a negative flow-on effect on its major trading partners.

World Bank (2019) GB Country Data World Bank [on line]. Available at: https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=GB retrieved 7 February 2019 5 IMF (2016) World Economic Outlook (WEO) update: Uncertainty in the Aftermath of the U.K. Referendum International Monetary Fund [on line]. July 2016.

Available at: https://www.imf.org/external/pubs/ft/weo/2016/update/02/ retrieved 5 February 2019.

6 Romei, V. and Fray, K. (2018) IMF shows poor track record at forecasting recessions. Financial Times [online] April 9 2018. Available at: https://www.ft.com/ content/60581224-3335-11e8-b5bf-23cb17fd1498 retrieved 7 February 2019.

7 United Nations (2019) Signs suggest global economic growth spurt has peaked but will remain steady at 3 percent in 2019–2020. UN Department of Economic and Social Affairs 21 January 2019. Available at: https://www.un.org/development/desa/en/news/policy/world-economic-situation-and-prospects-wesp-2019. html retrieved 7 February 2019.

8 United Nations (2017) World Population Prospects: The 2017 Revision. UN Department of Economic and Social Affairs. 21 June 2017. Available at: https://www. un.org/development/desa/publications/world-population-prospects-the-2017-revision.html . Retrieved 7 February 2019.

9 Conway, A. (2016) Assessing the impact of Brexit on emerging markets. Schroders [on line] 24 June 2016. Available at: https://www.schroders.com/en/insights/ brexit/assessing-the-impact-of-brexit-on-emerging-markets/ retrieved 7 February 2019.

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UK TRADE WITH UNITED ARAB EMIRATES TOP 5 IMPORTS GOODS 5-years Change Mechanical power generators (intermediate)

100%

Refined oil

82%

Aircraft

82%

Scientific instruments (capital)

82%

Non- Ferrous metals

82%

0

500

1,000

1,500

2,000

2,500

TOP 5 EXPORTS GOODS 5-years Change

0

Mechanical power generators (intermediate)

100%

Telecoms and sound equipment (capital)

72%

Cars

51%

Other manufactures (consumer)

76%

Scientific instruments (capital)

27%

500

1,000

1,500

Source: UK Trade Statistics, Office for National Statistics

2,000

2,500

UK institutions will be slow to make decisions until the immediate effects of Brexit are over and the future of the UK economy as a whole becomes clearer, which in practice means well into 2020 and possibly longer: ‘Business will not be able to protect itself fully from the inevitable bottlenecks that would arise, at least for a while’10 , probably 2020 according to an assessment by the Dubai government, which might seem optimistic now11. This will apply to decisions about the Gulf as much as anywhere else, both positive and negative. The cost will be inefficiency for UK institutions, but they have no alternative.

From the data, it is evident that the UAE has been steadily closing its trade gap with the UK, thanks largely to its position as an entrepot for mechanical goods and aircraft, as well as refined oil exports. Brexit can be expected to result in a slowdown, at least in the short term.

The evidence can be seen in the direction of global Foreign Direct Investment (FDI). By no means the only cause, Brexit has also contributed to a downturn. The losers from this downturn have been predominantly OECD countries, although the UK has, in fact, done relatively well. OECD-area FDI inflows fell by 36% in the first half of 2018, but the new volatility of FDI is illustrated by the fact that this followed a 66% rise in Q1 and then a fall of 71% in Q2. Meanwhile, Dubai has experienced a steady rise in FDI12, fuelled in part no doubt by the prospect of legal reforms (which have now happened, the new Foreign Direct Investment Law in particular)13 but reflecting to a significant degree the new normal.

INTERNATIONAL FDI BEFORE AND AFTER BREXIT 1,200

1,000

800

600

400

200

0

Q1

Q2

Q3

2014

Q4

Q1

Q2

Q3

Q4

2015

Quarterly trends

10

Q1

Q2

Q3

Q4

2016

Q1

Q2

Q3

2017

Q4

Q1

Q2

2018

Half year trends

S&P (2018) Looking Over The Edge On Trade And Brexit. Standard and Poors 27 September 2018. Available at: https://www.spglobal.com/_division_assets/ images/special-editorial/credit-conditions-emea-looking-over-the-edge-on-trade-and-brexit.pdf retrieved 11 February 2019 11 Dubai Government (2017) Dubai Economic Prospects 2017-2018. Available at: http://www.dubaided.ae/StudiesAndResearchDocument/DEProspectsEng-2017. pdf retrieved 11 February 2019 12 UNCTAD (2018) UAE Country Fact Sheet. Available at: https://unctad.org/sections/dite_dir/docs/wir2018/wir18_fs_ae_en.pdf retrieved 10 February 2019.

13 Discussed by Watson, Farley and Williams (2018) New UAE Foreign Direct Investment Law. Available at: http://www.wfw.com/wp-content/uploads/2018/11/ WFWBriefing-UAE-Foreign-Direct-Investment-Law.pdf retrieved 10 February 2019.

Source: OECD14 It must in fairness be recognised that the one counteracting and beneficial effect of Brexit on the global economy and through to global real estate markets, has been lower interest rates, which has encouraged borrowing and resulted in substantially higher investment allocations to real estate than historical averages. Based on questionnaire results to European fund managers, Catella Research in 2018 reported that ‘In the phase of low interest rates, businesses will avoid speculating in the funding of stocks and instead secure their assets with direct investments in real estate products’15. Whilst it is true that real estate is not directly correlated to bond yields, in this sense, regulatory responses to Brexit, and other economic challenges to global growth, provide an element of automatic stabilisation to real estate markets. This includes in the UAE, given global correlation in interest rates.

The conclusion? The eventuality of a deal of some sort, or no deal, whether accompanied by Brexit or not, is of less importance for the macroeconomics than the uncertainty that has already transpired. In fact, provided the uncertainty does end – which makes postponement of Article 50 the least-best outcome – the first ripple of Brexit is probably already subsiding. It is doing so, however, only to make way for the next one.

Substituting for London in the medium term The second impact is the consequence of the impact of Brexit on UK real estate itself. Back in 2016 there was conflicting opinion about the impact of Brexit on the UK market itself. Most fundamentals in the UK market pointed to a stall in price growth in any event; even the most ardent supporters of UK EU membership have now had to agree that Brexit itself seems to have added very little to that stall16. All this is far from the chaotic outcomes suggested by some: the Bank of England, for example, a cheerleader for Project Fear, has maintained that capital values on commercial property could fall by 27% over five years under any Brexit that omits a single market and customs union (i.e. anything that the Brexiteers in the Conservative Party would find acceptable) and by 48% under the no-deal scenario that concern Remainers17, with Governor Mark Carney adding fuel to the fire by holding out the view that house prices could also tumble by 35% if no deal were struck18. A correction was probably due in any event, and such figures may prove exaggerated even if there is no deal, but they are significant nonetheless: this is what political uncertainty does to real estate markets.

14

OECD (2018) FDI in figures. October 2018. Available at: http://www.oecd.org/investment/FDI-in-Figures-October-2018.pdf retrieved 10 February 2019.

Catella Research (2018) Market Tracker May 2018. Interest Rate Turnaround and Real Estate Allocation – how will asset managers react to a change of interest rates? Catella Research May 2018. Available at: https://www.catella.com/globalassets/documents/germany-corporate-fin/4-catella_mt_may_2018_assetallocation_en.pdf retrieved 7 February 2019.

16 Office of National Statistics (UK) UK House Price Index: November 2018. Available at: https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/ housepriceindex/november2018 retrieved 10 February 2019.

17 Bank of England (2018) EU withdrawal scenarios and monetary and financial stability. A response to the House of Commons Treasury Committee. Bank of England, 28 November 2018, p.52.

Available at: https://www.bankofengland.co.uk/-/media/boe/files/report/2018/eu-withdrawal-scenarios-and-monetary-and-financial-stability.pdf? la=en&hash=B5F6EDCDF90DCC10286FC0BC599D94CAB8735DFB retrieved 10 February 2019.

18 Elliott, F. (2018) House prices would crash by a third in no‑deal Brexit, says Mark Carney. The Times [on line]. September 14 2018. Available at: https://www. thetimes.co.uk/article/house-prices-would-plummet-in-no-deal-brexit-says-carney-csgr9j0hj retrieved 10 February 2019.

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Suggestions were made19 that other jurisdictions, Germany in particular, would represent safe havens for investment after Brexit. Now, with the prevailing view that the German real estate market has now peaked20, fund management is looking for opportunities outside Europe altogether. SWF analysis of Brexit points to safe havens in locations such as Singapore, Hong Kong, and Canada, but above all any US $ denominated jurisdiction, including the Gulf, the UAE in particular. Evidence for this has already emerged in the interest Chinese investors have in Dubai. Indirectly therefore, Brexit will lead to a wider range of investors in Gulf real estate, and more interest from those whose principal concerns are the difficult combination of persistent political stability and equally consistent relatively high yields. Conversely, UAE firms are likely to strengthen their own interest and ties with China, with the evidence already there: HSBC reported in November 2018 that 39% of UAE companies believe that China will be their most important market in the next five years21.

Regional and sectoral indicators Brexit has debunked another piece of conventional wisdom in no uncertain terms, that better returns in real estate are almost always obtained by concentrating investment on leading markets and Grade A property. This has manifestly not proven a reliable strategy in Brexit Britain. Returns in high-net worth transactions, especially in London, where prices fell 0.7% compared to a national average of 2.8% in the year to November 2018 – actually up slightly from 2.7% in October 2018 – have been significantly lower than in other UK cities. Property portal Zoopla used the Hometrack UK Cities House Price Index to identify the best cities to buy property in the UK. Leicester, Edinburgh, Manchester, and Birmingham were the top four, with unlikely candidates Liverpool, Sheffield, and Leeds also among the top ten. Zoopla has also collected agent forecasts22 strongly suggesting that this counter-conventional trend will continue, a view shared by respondents to the RICS sentiment survey taken at the end of 201823 as well as by investors such as Seven Capital24. Although this trend is not entirely exceptional – a similar phenomenon was observed during the severe real estate recession in the early 1990s, for example, and even during the financial crisis – most of today’s investors will never have experienced anything like it. Their response, so far as Gulf markets are concerned, will surely be to do more homework on whether lesser known markets and sub-markets are worth more careful study in relation to affordability and value for money, supply/demand imbalances, zoning and development planning, and answers to the most important question: where potential purchasers of new developments will actually be found. The importance of a strong domestic demand base by comparison to potentially fickle overseas investors who are not residents has not been lost on UAE

19 e.g. by Ashurst (2017) German real estate – the fallout from Brexit. Built Environment Insights (2). 26 September 2017. Available at: https://www.ashurst.com/ en/news-and-insights/insights/german-real-estate/ retrieved 10 February 2019.

20 Reichel, R. (2018) Has Germany’s commercial real estate reached its peak? Handelsblatt [on line] 19 December 2018. Available at: https://www.handelsblatt. com/today/finance/come-on-2019-has-germanys-commercial-real-estate-reached-its-peak/23777186.html?ticket=ST-2964192-dXle5BQaAy5neTSBsT4h-ap4 retrieved 10 February 2019.

21 HSBC

(2018) Available at: https://www.business.hsbc.com/trade-navigator/made-for-china retrieved 7 February 2019.

Burridge, N. (2019) 2019 Property Market Regional Forecast. Zoopla.com 1 January 2019. Available at: https://www.zoopla.co.uk/discover/property-news/2019-property-market-regional-forecast/#VqU5sU0QuwtKdQcH.97 retrieved 10 February 2019 23 RICS (2018) December 2018 UK Residential Market Survey. Royal Institute of Chartered Surveyors. December 2018. Available at: https://www.rics.org/globalassets/rics-website/media/knowledge/research/market-surveys/uk-residential-market-survey-december-2018-rics2.pdf retrieved 10 February 2019 24 Hodson, T. (2018) UK’s Best Areas for Property Investment in 2019. Seven Capital. Available at: https://sevencapital.com/property-news/uks-best-areas-forproperty-investment-in-2019/ retrieved 10 February 2019.

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policymakers, who have been steadily improving the opportunities for investors to become long-term UAE residents25.

The sectoral lessons are no less significant. In the past decade the best performing real estate asset, aside from land, which has no direct equivalent in the Gulf for most investors, has been high-end residential. By contrast, in 2018: ‘Warehousing is a growing and important component as e-commerce uses this subsector and is taking market share away from retail. The structural reasons for the industrial sector’s growth have overwhelmed any negative uncertainties from Brexit’26. As Brexit continues the need for even more warehousing is emerging to manage customs realities that have not existed for a generation. The impacts of Brexit on the Gulf and its real estate market do not, however, end there.

Currency: the significant effect on sterling Undoubtedly one of the most significant effects on the Gulf real estate market from Brexit has been that of the shift in currency pricing relationships. As the definitive FTSE Russell paper on the question pointed out, ‘The currency market is the world’s largest financial market and, with the ongoing globalisation of portfolio exposures, is becoming an increasingly important component of investors’ returns. However, if investors share their currency exposures with those implicit in their equity, fixed income or other benchmarks, they may be setting their currency policy unconsciously, rather than consciously’27. The paper suggested that, depending on the asset class, unconscious exposure to the US dollar ranged between 40-56%. Similar research from the MSCI IPD Global Annual Property Index, which explores how currency has affected past performance28, suggested that the high figure of 83% of domestic real estate investment will have fallen since 2013, whilst both total returns and the standard deviation of returns demonstrated, over the 17-year history of the index, wide swings depending on the investment reporting currency. Significantly, even by the end of 2017 the disparity between sterling and dollar-adjusted returns was evident: true, sterling returned slightly better total returns, but this was more than counterbalanced by the higher standard deviation measuring risk. If the same performance measurement exercise were undertaken again today, the gap would be even wider.

What Brexit has therefore shown is that exposure to sterling is a considerable, and rising, risk for approximately half of those global investors who are – whether by choice or without any plausible set of alternative investments – locked into dollar returns.

UAE Government (2018) Long Term Residence Visas in the UAE. Available at: https://www.government.ae/en/information-and-services/visa-and-emirates-id/ residence-visa/long-term-residence-visas-in-the-uae retrieved 11 February 2019 26 Santander (2018) UK Real Estate Market Report 2018. Available at: https://www.santandercb.co.uk/s3fs-factsheets/real-estate-market-report.pdf retrieved 10 February 2019 27 FTSE Russell Group (2015) Currency Questions for Global Investors. October 2015. Available at: https://www.ftserussell.com/files/research/currency-questions-global-investors retrieved 10 February 2019.

28 Reid, B. (2018) The Increasing Importance of Currency Risk in Real Estate. MSCI Summer 2018. Available at: https://docs.prea.org/pub/9ac89025-fe46-72d31412-f1c33ac64b48 retrieved 10 February 2019 25

A SEMI-PERMANENT STRUCTURAL SHIFT IN STERLING

110

105

100

95

90 Apr ’16

Jul ’16

Oct ’16

Jan ’17

Apr ’17

Jul ’17

Oct ’17

Jan ’18

Apr ’18

Jul ’18

Oct ’18

Jan ’19

Source: PoundSterlingLive.com (2019)29

The significance of this shift is very considerable in terms of the relative performance of dollar-denominated real estate assets. The straightforward truth is that when the referendum took place, the dollar/ sterling exchange rate stood at 1.47. Now, it stands at 1.3, having touched as low as 1.2 in January 2017, a 31-year low30. Even assuming that two properties performed identically in the Gulf and the UK, depending on when rents were paid, renewal dates, any locked in rentals and crucially the timing of sales, that would mean a performance disparity of around 12%, although potentially even more, if timings were really atrocious. This is a performance gap that no amount of efficient management or prudent property selection could have counteracted with any likelihood of success.

The traditional view is essentially based on assumptions about regression to long-term means. It suggests that risk is exacerbated when the investor is engaged in short-term value-added projects, development opportunities or land speculation, in comparison to longer-term rentals, where – the investor hopes – exchange rates will return to the mean. Some investors have suggested informally that the low value of sterling represents an investment opportunity; it is obviously of benefit to expatriates remitting to the UK and exchanging into sterling. However, in the medium term, which has now been entered so far as Brexit is concerned, the change appears to be structural, and certainly not likely to reverse itself within the usual timeframe required for investment analysis. Global investors may well be diversifying away from OECD countries, but if FTSE Russell is right, they would still prefer the dollar to form approximately half of their investment portfolios. There can be little doubt, therefore, that the currency effect of Brexit on Gulf real estate is significantly positive.

Synergy with a low-tax Brexit Britain: the view for the long term All of this could well turn out to be an entirely short- to medium-term phenomenon. Of all the impacts of Brexit, the most significant, if it happens, will not manifest itself for several years. In the longer term, the newly independent UK government will take urgent steps to encourage overseas investment in the UK real estate market. What Brexit will do, especially if the UK Conservative Party retains and consolidates its hold on power in London as the natural party of Government – something which Scottish independence would almost inevitably deliver – is to reinforce this tendency, with London potentially in the lead, by cutting taxes and encouraging FDI. Their vision will be a low-tax, politically stable UK as an alternative to Dubai – Dubai-lite. The agenda is clear enough, and some statistics give a background to its solid plausibility.

29 30

https://www.poundsterlinglive.com/bank-of-england-spot/historical-effective-exchange-rates/GBP-history#charts retrieved 10 February 2019.

For an updated chart of sterling exchange rates, see https://www.exchangerates.org.uk/brexit-pound-exchange-rate-tracker

But look more carefully into the mechanics of estate agency and the way in which real estate is traded, and another quite different possibility emerges. We could term this market synergy. But while the general idea is clear enough, there is currently no way to measure its extent: the need for measures of global integration of economies, including real estate markets, is clear.

In this context, the signature of the 2016 UAE-UK Tax Treaty takes on especial significance as one of the first obvious steps in precisely this direction. The UK levies Withholding Tax (WHT) at a rate of 20% on interest paid to non-resident companies and individuals based on its domestic laws. However, the Treaty will potentially override the UK domestic tax law and reduce the UK WHT on interest arising in the UK and beneficially owned by UAE resident companies and individuals to 0%31. Not only that: Brexit, provided it is not in its soft form with an EU-UK customs union remaining, would mean that Gulf proposals for a UK trade deal would no longer depend on EU approval. Free trade and capital movement between the UAE and the UK, and the ability of real estate investors in the UK to avoid UK taxation through their UAE residency, is undoubtedly likely to encourage the performance of the sector in both countries – at the expense of those outside the magic circle of synergy.

Three indirect effects Contracts: The legal impact of Brexit. Another long-term combination of more sophisticated, better advised real estate investors in the UAE and Brexit is that contracts will henceforth contain many more broad precedent conditions and get-out clauses. Events such as the outcomes of referenda are easy enough to introduce into real estate contracts and were reported even as the Brexit process was underway32. More complex are outcomes across a spectrum, which can come close to introducing earn-out style deals into the real estate sector.

Political Risk: The new normal in real estate. The final impact of Brexit may be not so much on what, but how real estate investment is conceived. Although lip-service has been paid to political risk, investors in the Gulf have always behaved as if it did not really exist, despite the obvious examples in the region of its absolute necessity. Sophisticated analytical organisations such as the Oxford Business Group (OBG33), with a wealth of experience in the region, have existed for many years, with plenty of useful advice to give. But they have found it difficult to gain traction amongst real estate investors. Now, with REITs and new property laws opening up investment to overseas buyers, Brexit will hasten the convergence of the process of analysis in the Gulf with that elsewhere in the world. While the dystopian vision of Mohammed El-Erian for ‘less efficient economic interactions, less resilience, more complicated cross-border financial flows, and less agility’34 may be slightly too gloomy for verisimilitude, it does seem very likely that there will be some negative impact on established global norms; he is quite possibly right about the increasing significance of tax and regulatory arbitrage as government policy tools, and as Will Robson from MSCI put it on their blog, there are now few places to hide from geopolitical risk35.

31 Ernst & Young (2016). UAE and United Kingdom sign Income Tax Treaty. Ernst & Young [on line]. Global Tax Alert 14 June 2016. Available at: https://www. ey.com/gl/en/services/tax/international-tax/alert--uae-and-united-kingdom-sign-income-tax-treaty retrieved 7 February 2019.

32 Reuters (2016) Brexit clauses in UK property deals as Gulf investors hold back. Reuters 5 June 2016. Available at: https://www.thenational.ae/business/ property/brexit-clauses-in-uk-property-deals-as-gulf-investors-hold-back-1.180488?videoId=5766484581001 retrieved 7 February 2019.

33 www.oxfordbusinessgroup.com 34 El-Erian, M.A. (2018) Brexit and the Global Economy. Project Syndicate 22 November 2018. Available at: https://www.project-syndicate.org/commentary/ brexit-fracturing-of-the-global-economy-by-mohamed-a--el-erian-2018-11 retrieved 11 February 2019 35 Robson, W. (2019) 2019 Emerging Real Estate Trends. 5 February 2019. Available at: https://www.msci.com/www/blog-posts/2019-emerging-real-estate/01243379405 retrieved 10 February 2019

Managing risk wherever possible. While the development of Political Risk Insurance for real estate investments is a pipedream, at least for the foreseeable future, rapid changes in exchange rates and potentially, interest rates, has placed a renewed emphasis on traditional risk management tools such as hedging, diversification and correlation analysis, especially between UAE and global real estate markets. This will strengthen the hand of investment banks capable of providing this kind of service to real estate clients in the UAE.

Conclusion The short-term effect on the real estate sector, of change, uncertainty and confusion in any jurisdiction, is almost inevitably a decline in investment, a diversion to other jurisdictions and a consequent fall in value.

Add to that the size of the UK economy and the effect in the short term is largely negative, except for the restraint on international interest rates to which it has undoubtedly contributed.

In the medium term, with the poor performance of the UK real estate market – London and high-end residential property in particular – and of sterling, with numerous financial institutions announcing, or threatening to announce, their departure from London, and no turnaround on the immediate horizon, investors are scarcely likely to return to the London market in any strength. Every reduction in the UK’s economic and market performance below the pre-Brexit baseline is likely therefore to strengthen alternative investment destinations, especially those without significant currency risks with respect to the dollar.

Long term, however, the significance of Brexit depends on which way the UK political and economic landscape evolves. If, as on seemingly likely the balance of probabilities, the UK bases its future prosperity around a low-tax, international real estate market with close connections to successful global centres such as New York, the UAE, Singapore and Hong Kong, then market recovery in the UK will be closely correlated with that of the UAE. Not only that, but the two real estate markets and their economies as a whole will be bound even more closely together than they are at present.

In whichever place the Brexit debacle ends up, it has had effects on markets as well as government policies right around the world, including to no small extent real estate markets in the Gulf. Brexit, therefore, has added to the multipolarity of the global real estate market in the second decade of the 21st century.

Its landmark effect is likely to be this: before Brexit, almost universal conventional wisdom held that safe havens were always developed, Western economies. No longer. The new normal is that a safe haven can be anywhere. We may term this new set of perceptions and rules of analysis The lesson of London. And it will be learned everywhere, including in the Gulf. The law of unintended consequences, right enough.