It’s now almost three years since the Brexit referendum, and we are still no clearer about what the UK’s departure from the EU will look like. One thing is certain though: ongoing Brexit uncertainty is impacting the market for real estate. International investors need to prepare for this. But how? What is likely to happen and what could happen? And above all, what are Brexit’s implications for Berlin? We venture a prognosis.
Deal, no deal or further extensions? Almost everything is still open at the moment (as of April 11, 2019): concessions on trade, a second referendum or a no-deal Brexit complete with tariffs and border controls.
Should the last scenario – a no-deal Brexit – come about, the UK would be regarded by the EU as a third country with a status similar to China’s or the USA’s – but without a valid trade agreement. That would also have repercussions for the German real estate industry. After all, a chaotic unregulated withdrawal would impact the international investment and financing environment and directly affect the real estate industry in Germany and Europe.
Chaos, uncertainty, incalculable risks. The ongoing Brexit dilemma is impacting the international investment and financing environment. And with it the German and European property industry. We venture a prognosis.
Real estate financing might get a reprieve
Providing EU rules do not place lending restrictions on banks, real estate financing could become easier for UK citizens.
Since its introduction in 2016, the German interpretation of the EU Residential Real Estate Credit Directive has made it much harder for buyers from EU countries not in the eurozone to take out foreign-currency mortgages. Prior to the Directive’s implementation, getting a euro loan was not a problem for buyers from countries such as Great Britain, Poland, Denmark or Sweden. But afterwards, banks were made to accept liability for foreign currency risks. Thus, under the current rules, a Belgian buyer has a much better chance of securing a German mortgage than a British one. And since the directive only applies to EU nationals, Britons are even worse off than buyers from outside the EU – Americans, Asians or Russians for instance.
If the UK leaves the EU, these rules will likely no longer apply, making it easier for Britons to secure real estate financing in Germany
Interest rates will continue to fall
One thing is certain: Brexit has created uncertainty amongst investors. How the European economy will react remains unknown. For this reason, investors have been shying away from British bonds in favour of safe havens such as German government bonds. This has driven up prices and pushed down interest rates. And since interest rate developments in real estate financing are geared towards long-term bonds, mortgage rates have also fallen.
The British parliament’s theatrical inability to find common ground with Prime Minister Theresa May has only intensified this effect on the capital markets.
Due to this uncertainty, demand for German government bonds is unlikely to fall for the time being, which is why investors are still likely to benefit from low mortgage interest rates for some time to come.
London down, Berlin up: housing market demand
This growing uncertainty is also impacting house sales in the UK. And because supply exceeds demand, prices have been flattening for months, not only in London but also across the UK housing market as a whole. The same applies to Sterling.
Experts agree that Brexit’s impact will be felt across the UK property market for some time. In a no-deal scenario, it could even collapse.
Investors are looking for alternatives and German cities – especially Berlin – are proving more attractive than ever. Economic diversity, first-class educational and research institutions, as well as a growing technology sector, are just some of the reasons for investing in the German capital.
What is more, Germany offers foreign investors political stability, excellent infrastructure and a generous welfare state. Population and employment growth are keeping demand high while unemployment is falling. And, last but not least, the safe legal framework provided by German law makes investing here additionally attractive.
Banks and businesses jump ship
Until now, banks have preferred London as their gateway to the European single market. But since the referendum, financial centres like Frankfurt, Paris or Dublin that have been competing with one for this business.
Felix Hufeld, President of the Financial Supervisory Authority BaFin, said at the authority’s New Year’s reception in Frankfurt that more than 45 financial institutions are in the process of establishing or significantly strengthening their presence in Germany. And no matter which or how many there are in the end, the German financial mecca of Frankfurt will benefit first and foremost from this powerful economic shift.
This applies to Berlin too, which, in addition to banks, is attracting fintechs and numerous other enterprises from a wide range of sectors. Berlin also runs a close race with London when it comes to start-ups, artists and the creative industry. Berlin’s highly skilled workforce adds to the city’s appeal and, for fintech especially, have already gained Berlin a reputation as a stronghold.
Yet another scenario could be that Berlin becomes even more attractive to the US and Asian companies. Whereas London had always been the address of choice for entry into the European market, it will probably be passé after the Brexit.
Brexit makes Berlin the place to be
Patterns are also changing in the private sector. Many, particularly young highly qualified Britons, want to leave the UK. And those who have already left don’t want to go back.
Looking for a safe place to invest their money, some Britons are looking to buy new apartments outside of the UK. And for many, Berlin offers just the kind of security they are looking for.
It is even rumoured that London estate agents have long since been luring their customers to mainland Europe – a strategy that goes as far as aggressively advertising apartments and houses on the continent complete with buying instructions.
Uncertainty is certain: a conclusion
Amongst entrepreneurs, capital investors, the public and the politicians, a lot of real uncertainty exists. But the reality is that, even after a no-deal Brexit, EU citizens will be able to work and remain in the UK. The British government has made it categorically clear, after Brexit, no fundamental changes will take place in the lives of those living in the UK. Nevertheless, an unregulated withdrawal from the EU, will almost certainly mean there are transition periods across specific regulatory areas.
One thing’s for sure though: Whatever happens, it will be a tightrope act. Another certainty is that there is no other city in Europe with the same potential for development as Berlin. Despite concerns about high real estate values, price-wise Berlin is still playing catchup compared to other leading European cities. Against this background, 2019 will very likely prove to be a very exciting year for property investments.
