EU REFERENDUM Policy Background to the debate and the potential impacts on real estate
Contents Introduction 3 Background 3 The campaign 4 The process of leaving 5 The EU and UK real estate: potential impacts 5 Uncertainty 5 Trade and investment 6 Free movement of people 6 Financial markets 6 Policy matters 6 Likely scenarios 7 Conclusions 7 2
Introduction As the voice of the real estate industry, we seek to put forward well-reasoned, thoughtful contributions to policy debates. The EU Referendum is no different in that regard. We are not able to say definitively whether remaining in the EU or leaving the EU would be the best choice in the long-term for UK Real Estate, simply because we do not know what circumstances would hold if the UK were to leave the EU. Individual member companies may be better placed to make a choice based on the impacts upon them as an organisation. An additional complexity is represented by the relative diversity of BPF s membership the choice for a UK-only developer may be somewhat different to that of an agent. The issue for the BPF is not only whether or not it is possible to form a clear industry view ; but how helpful any such view would be, or be perceived to be, in the debate and therefore what impact we could have. This paper sets out the background to the debate, some likely impacts on the real estate sector, and potential scenarios that we may face in the coming months. Background A pledge of the Conservative Party at the last Election was to offer, on forming a Government, an in/out referendum on membership of the European Union by the end of 2017. On February 18th and 19th, the European Council considered a package of proposals advanced by the UK, and following their successful negotiation, a Referendum date has been set for 23rd June 2016. In early February, the Government set out its list of proposed reforms to the President of the European Council, Donald Tusk: 1. The European Council (with representation from all EU members) to take key decisions on Eurozone matters, in order to avoid disenfranchisement of Single Market non- Eurozone members. 2. Measures to shore-up/protect the Eurozone to be funded out of the pocket of Eurozone members. 3. Indexation of exported child benefit. 4. A relief mechanism whereby member states (not just UK) can appeal to the Commission and Council to grant a temporary brake on in-work welfare benefits to migrant workers, granted for an initial term that is extendable on reapplication. 5. Safeguards to be set in place in respect of future EU enlargements in order to guard against sudden movements of workforces from applicant countries to the existing EU member states. 6. No application of freedom, justice and security policies to the UK without explicit consent of the UK. This may set a precedent with regard to the use of passarelle 3
clauses, where decision rules can be changed provided there is unanimity among member states to change decision rules in Council to QMV (i.e. some member states become a special case, undoing the convenience of the use of such clauses). 7. On the issue of sovereignty, the UK advanced a red card provision which would allow national parliaments to block EU legislation under certain circumstances. The blocking mechanism could be triggered for up to three months after legislation is proposed if a threshold of national legislators is met. The proposed reforms were agreed by the European Council, and a date set for the Referendum. It has been underscored by the Commission that it does not expect to revisit the terms of UK membership in the event of a vote to leave the EU. A number of member states, including France, Germany and Italy, conceded ground on matters relating to economic migration within the Union (some member states, such as Germany, depend on the influx of people of working age since they have declining populations). All three are unlikely to wish to revisit the UK s requests and grant further concessions without a) demanding something in return and b) perhaps revisiting aspects of the original deal. On repatriation of powers, the previous Government undertook a wide-ranging Balance of Competences Review that resulted in 32 reports that concluded that the current balance between Member State and EU competences was broadly correct. The Lords EU Scrutiny Committee criticised the Government for failing to honour an earlier commitment to produce an analysis of the Report and to consolidate the 32 reports. However, in essence the Government has an evidence base on which to proceed to produce headline positions. With regard to the role of Parliament in European matters, most European countries have responded to the exigencies of membership of the European Union using existing parliamentary structures. It is really up to member states themselves to arrange suitable constitutional arrangements for approval of European decisions, and indeed a counterweight to the executive s decision making when acting in the European Council and the Council of Ministers. The German Bundesrat and the Danish Folketing have to approve their executive s positions on European legislation and treaty reform, for example. It is entirely possible for the Government to act to enshrine a stronger parliamentary process than currently exists without the need for agreement among the European Institutions. A vote to leave the EU may also encourage revisiting the matter of Scottish Independence. The campaign There will be an official In/Yes Campaign and a Leave/No Campaign in the run up to the Referendum vote, and each will be given resources to publicise their campaigns. Organisations that wish to play a role in the campaign will be subject to strict spending thresholds, and organisations that expect to meet or breach them will have to register as official campaigning groups with the Electoral Commission. 4
The process of leaving In the event of a vote to leave the EU, any policy changes will take some time to materialise, since there is an established but untested process for a member state to leave the EU via Article 50 of the EU Treaty. Invocation of Article 50 leads to a time-limited two year negotiation period during which a withdrawal treaty must be negotiated. The withdrawal treaty would essentially set the parameters for the UK s ongoing relationship with the EU (which could take a number of known forms). The two year negotiation period can be extended by unanimous agreement by the member states in the European Council but if not, the debate is effectively subject to cloture, and thus negotiations may not be concluded. At that point, the UK Government will face a decision as to what should happen to the corpus of existing EU law. In the UK, a significant proportion of European legislation is enacted by virtue of the European Communities Act 1972 which contains broad executive powers for the purpose, and delivered via statutory instrument. Following the conclusion of the process set out under Article 50 of the Treaty the treaties will no longer apply. The UK Government would then be obligated to repeal the European Communities Act 1972 as this gives supremacy to EU over UK law. Most legal commentators, including BREXIT campaigners such as John Redwood, seem to agree that the prevailing Government would seek to ensure continuity and maintain existing arrangements by simply adopting the corpus of existing EU regulation. However, it seems likely that this would have to be undertaken via an omnibus bill, and as such could be subject to political tides that wish to remove or adapt existing policy. Thus at least over the time horizon to 2018 in the event of a vote to leave, there may be a significant measure of policy uncertainty. The impact of BREXIT for real estate is very much dependent upon the terms negotiated upon such an exit, which is why it is difficult to say categorically whether a vote to leave would be the best outcome for real estate. The EU and UK real estate: potential impacts Uncertainty The effect of both the General Election and the Scottish Referendum have highlighted that uncertainty has a pronounced effect upon the property market. In the case of the EU Referendum, this effect is likely to be longer-lasting, since on the one hand it is unlikely that Eurosceptics will unconditionally accept a vote to remain result, and on the other, the process of leaving the EU would be protracted and take place over the course of years. Equally, ongoing UK membership of the EU may pose its own challenges as rising popularity for nationalist parties across Europe may frustrate decision making processes within the EU, and adoption of policies at national level, and there remains lack of consensus on the future of the EU, including along historic cleavages between national governments who favour a Europe based on competition and trade and those who would prefer to see that amplified with interventions in social affairs. 5
Trade and investment The UK s net contribution to the EU budget is something less than 1 per cent of GDP. The question remains whether the savings would be outweighed by the loss of trade and investment as well as the loss of coordination and learning effects from established policy, rules and regulations being placed in a state of flux. Free movement of people Some BPF members have articulated that there is a skills gap in the UK construction industry and that skilled and unskilled workers from the continent are of vital assistance to the delivery of current and future pipelines until this skills gap is addressed. Successive construction industry reviews, including the Latham and Egan Reviews and the current Farmer Review have recognised this problem. From an occupier perspective, manufacturing would likely experience economic disadvantages in the event of a vote to leave the EU. Other emerging alternative investment sectors that could be negatively affected include student housing, and the healthcare and hotel sectors, given the importance of free movement of students and employees respectively within the EU to their ability to thrive. The current rate of immigration is also implicit in house pricing today since constrained supply is combined with high immigration can result in house price rises. Additionally, the outward perception that the UK is closed may alter perceptions and mechanics of what makes the UK attractive to the world as a place to do business. Financial markets The effect of EU membership on the City of London has been to afford it new European markets for banking and finance firms in the UK. London remains the EU s largest wholesale financial centre and the City and Docklands form the core of the Eurozone s financial system. BREXIT would not necessarily result in a large scale brain drain away from London by skilled financial workers due to the other cultural and economic benefits that London affords to them. However, trading in the euro may be under pressure to return geographically to the main continent and many of the scenarios offered following the vote to leave result in a loss of UK voice in EU financial regulation, which may put it at a disadvantage. Policy matters With regard to energy and environment policy, EU legislation has led the UK to headline renewable energy targets, energy certification for buildings and thermal performance standards. Further requirements for monitoring of wild birds and protected species around major developments have been enshrined in planning law. We would expect such requirements to remain, but realistically the current Government would likely seek to review and to rationalise this framework, much as it has already done with regard to the Business Energy Tax Reform Review. Contrary to some fears, a race to the bottom in environmental policy standards is unlikely, not least because the UK remains a member of various international fora and agreements that place their own decision-making processes and aspirations on the Government. In addition, the Government would have to handle fairly well-established and well-resourced groups and individuals with influence over the policy agenda. 6
On planning matters in general, the influence of the EU has been limited to Environmental Impact and Strategic Environmental Assessment legislation, as well as aforementioned legislation around protected species and habitats. Given the presence of wildlife, habitat and biodiversity charities in policy networks that deal with such planning matters, it would seem unlikely that the effect of such policies would be withdrawn, even if their method of delivery were altered. On health and safety matters, a significant volume of European law has been driven by the EU, both from the perspective of construction projects and workplace health and safety (with its incumbent obligations upon landlords). Likely scenarios Insofar as the future relationship between the UK and the EU is concerned in the event of a vote to leave, some likely scenarios are: 1. Bilateral item-by-item membership: Switzerland currently enjoys this relationship with the European Union, choosing to follow the rules for some policy sectors and not others. However, it does not enjoy membership of the Single Market and it took 9 years for Switzerland to negotiate its current position. Though Switzerland has negotiated a trade deal direct with China (by way of comparison with access to the Single Market), it is partial in scope and China has negotiated transition arrangements of 15 years before it will remove tariffs on some Swiss goods, whereas tariff removal on Swiss goods must proceed immediately. 2. Membership of the European Free Trade Association and European Economic Area: Norway enjoys this relationship with the European Union single market but it has no voice in negotiations on European Directives and Regulations (it must simply transpose, apply and enforce legislation) and contribute to the EU budget all the same. 3. EU Customs Union Membership: Turkey currently enjoys this relationship with the European Union. Turkey has to permit access to its market to any country with access to EU markets, but does not automatically enjoy the right of reciprocity. Turkey also has no influence over EU rules and trade deals, and is a silent partner (as in the case of Norway above). The UK services sector would not be covered by such a deal. Conclusions The outcome of the EU debate has been represented as a binary choice, but ultimately the vote on June 23rd represents only the beginning of a process in the event of a vote to leave, or the continuation of an ongoing process of evolution of the EU in the event of a vote to remain. It is clear that uncertainty is currently impacting markets adversely, but the long term implications of the decision in June are much harder to foresee and the diversity of the real estate industry means that individual BPF members may have very different perspectives. 7
OUR KNOWLEDGE AND ADVICE ON NATIONAL POLICY IS HELPING THE UK REAL ESTATE SECTOR GROW AND THRIVE Just one of the benefits of becoming a BPF member. www.bpf.org.uk/membership British Property Federation St Albans House 57-59 Haymarket London SW1Y 4QX T 020 7828 0111 info@bpf.org.uk www.bpf.org.uk