Background

The UK left the EU on 31 January 2020. However, under the agreement on the UK's withdrawal from the EU, the UK continued in most respects to be treated as if it were still part of the EU until 31 December 2020. Now that this transition period has ended, the full effects of this profound change in UK law and regulation apply.

On 24 December 2020, the UK and the EU finally agreed a deal – the Trade and Cooperation Agreement (TCA) – to govern significant aspects of the trade relationship between the UK and EU from 1 January 2021 onwards. For more information about the TCA, see The UK-EU Trade and Cooperation Agreement: an overview.

As the UK embraces its future outside the EU, what impact has Brexit had on UK real estate and what impact is it likely to have as we move forward in 2021?

Brexit and real estate: commercial rather than legal

The key impact of Brexit, both before and after the UK's withdrawal from the EU and the end of the transition period, has been and will continue to be commercial rather than legal. The laws underpinning property ownership, letting and conveyancing in England, Wales and Scotland are largely domestic in origin and so have been relatively unaffected by Brexit.

Commercially, however, the UK property market is not insulated from Europe (or indeed the rest of the world) and is susceptible to political changes both here and abroad. It does not generally respond well to uncertainty. The 2016 EU referendum result and subsequent political wrangling did have an impact on confidence within the UK property market although some sectors, notably logistics, showed great resilience and continued to perform well. 

However, concerns around the impact of Brexit on the UK property market have now largely been subsumed by the impact of COVID-19. Both have been catalysts for change, accelerating trends, such as the rise in online shopping and home working, which were already present before either COVID-19 or Brexit entered the public consciousness. The key difference is that COVID-19 is a global rather than domestic issue, meaning all property markets around the world face similar challenges around the repurposing, rethinking and redesign of space.

For more information on the impact of COVID-19 on property, please visit our COVID-19 hub by clicking here.

Pricing 

Brexit has now been priced into the market and the focus has shifted to the impact of COVID-19 on demand (and consequently, pricing) of different asset classes.

Funding

The problem for lenders over the last two years or so has been in sourcing new transactions as a direct result of the more limited activity across the real estate market and, in addition, sponsors being reluctant to refinance away from their existing funding partners due to a general desire for stability. COVID-19 has reinforced that desire for stability and we expect this to continue in the near future. 

Impact on occupational trends

While there have been some exits from the UK market due to Brexit, it did not trigger the exodus that many had predicted. The UK's departure from the EU will continue to be one of the factors being taken into account in commercial decisions to take on, retain or dispose of premises but it is unlikely to be the main driving force. Instead demographic and behavioural trends (such as housing shortages, internet shopping and flexible working) will have a much more pronounced impact, particularly in areas such as residential, logistics and retail. COVID-19 has fuelled these trends but has also encouraged a degree of "on-shoring", especially in connection with supply chains.

In 2019, there was one significant Brexit legal development relating to occupiers. In Canary Wharf Limited v. European Medicines Agency, the High Court ruled that the EMA's lease of premises in London would not be frustrated (i.e. brought to an early end) by Brexit and the EMA's consequential relocation to Amsterdam. This provided comfort to the market that Brexit could not easily, if at all, be used by occupiers to terminate their letting arrangements. We anticipate that frustration arguments are likely to reappear in the courts in 2021, but this time in relation to the impact on occupiers of government restrictions to control the spread of COVID-19.

Liquidity

Since the 2016 EU Referendum, deals have continued to be done albeit with a degree of caution. That caution is now probably less attributable to the effects of Brexit and more a consequence of COVID-19. 

Conclusion

Brexit has had a limited legal impact on commercial property in England, Wales and Scotland. Commercially, its effects have now largely been subsumed by the impact of the global COVID-19 pandemic, placing the UK in a similar position to other markets around the world. As we move through 2021, the focus will be on how the UK market adjusts to the challenges presented by COVID-19 and, as it does, identifying when and where new opportunities are likely to arise.