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SEP 2016

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30 SEPTEMBER 2016 "Brexit is not expected to produce a widespread recession in Europe," says René Buck, President & CEO of Netherlands-based global location advisory firm Buck Consultants International. "But if you compare various studies done by economists on the GDP impact of Brexit, the average net loss of GDP, permanent average loss, by 2030 is 5 percent. "Access to the European Single Market is very important to companies setting up operations in the UK. Forty-five percent say it is 'very important.' The UK has been a leader in attracting foreign direct investment (FDI); projections, however, range anywhere from 10 to 26 percent less FDI into the UK after Brexit. "What kind of post-Brexit trade agreements will the UK get? This is a key question. There are several options or possibilities, each with varying degrees of integration with the EU. They range all the way from the WTO option (no treaty, with low access to the EU marketplace) to the so-called Norway option, with relatively high access. Of course, only EU membership provides full access. One challenge is that the options which provide greater access to the EU marketplace also require the free movement of people, which is one of the main drivers behind the Leave vote in the UK. "If the EU allows one of its largest members to leave, have its own immigration policy and yet retain significant access to the EU market, then other members could be expected to follow, and this is something that the EU does not want. This will be a very difficult negotiation process, and for the next 2 ½ years we will not know the outcome. "There is a high risk of disruption for financial services because 41 percent of UK financial services are exported to the EU. If passporting rights are not adequately secured, the UK as a financial center will lose part of its attractiveness for the financial sector. There is a medium risk of disruption to insurance and professional services. "In manufacturing, several industries are at a high risk of disruption as a result of the UK leaving the EU without a proper trade agreement. These include automobiles; chemicals and pharmaceuticals; food, beverages and tobacco; and clothing and footwear. And that's just on the basis of tariff bar- riers. On top of these, there are the non-tariff barriers. It's a very complex process, but economists have forecast that the non-tariff barriers could add an additional five to 10 percent in costs. "Work force and talent concerns also play a role. What happens to the 3.3 million EU citizens now in the UK? Under what conditions can they stay? The current answer is, nobody knows. "Do not panic – yet. The UK is in the EU for at least the next two years. EU law is still applicable. Uncertainty will remain for at least the next 30 months; there is no way to avoid it. But the majority of companies operating in the UK cannot afford to wait two years to think about how they will respond." "For business strategy, what we're hearing at the moment is many plans, but little action," reports Iain Franklin, director at Source8. "We are hearing very public pronouncements of what it will mean for business strategy, and in financial services in particular. Companies such as JPMorgan and HSBC are announcing plans to move thousands of jobs from London. But they are just plans. They're doing what any business would be doing in an uncertain environment. I don't doubt that these public pronouncements are part of their posturing to try and sway political leaders and the public at large as to just how important the EU is to the UK economy. "One study from PwC estimated that 70,000 to 100,000 jobs in London might be lost due to Brexit. Such losses, of course, would be significant, but they won't happen overnight, and they can be managed with good business planning and real estate strategy. That's the feel in the market. We may be in for a rough period, but for now it is business as usual. Companies should build flexibility into their real estate plans, but not do anything drastic at this point. "In terms of what that means for location strategy, there are some interesting announcements. Siemens, for instance, have announced they are halting all future wind investments in the UK. But they have just spent the better part of $500 million on a plant in the UK which they will, of course, run to meet both domestic and export demand. Companies are ultimately going to be driven by the most important thing to them, which is the labor force. For financial services, the community and hub for that remains London. "Everyone acknowledges that free access to the EU market is essential for the UK. We anticipate that future negotiations will provide that type of access or, failing that, the government will come up with some form of tax incentives to ensure that companies still invest in the UK. "I do not think that long-term location strategy will change that much. But real estate directors will be buying flexibility, pricing and securing options in leases, and trying to keep as many on the table as possible. In- curring the sizable expense of relocation at this point seems hasty because they would be preempting a risk that is still unknown in impact. The best approach to deal with such risk is to mitigate and manage it as it emerges. "One sector in which there may well be loss is start-up/tech, because it is highly dependent on labor. The younger generation voted very strongly – in excess of 70 percent – in favor of 'Remain.' Tech has a very multinational labor force that could move very easily to Dublin or Berlin. That's the part of the UK labor force that is most at risk of moving as a result of Brexit. "CRE managers already consider their business in general, beyond just the real estate and people perspectives. Determining how to respond to Brexit for multinationals is in many ways no different than preparing for disaster recovery, and so this provides a great opportunity to check whether those plans are up to scratch and how other locations will respond. While it's not a disaster, Brexit certainly looks more real than many risks, and occupiers should plan and price for the flexibility needed in their real estate operations to prepare for this." Key issue: post- b rexit trade agreements ' f or or now, it is business as usual' now, or now, it is business as usual' it or now, it is business as usual' is or now, it is business as usual' business or now, it is business as usual' as or now, it is business as usual' usual or now, it is business as usual'

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