Brexit hits real estate as talent leaves UK, construction costs rise

The U.K. government's refusal to guarantee the rights of European Union workers since the country's decision to leave the economic and political bloc is damaging the nation's real estate and construction sectors as highly skilled foreign workers move overseas, an industry conference in London heard.

Speaking at the British Property Federation's annual conference at the Royal Institute of British Architects, Roger Madelin, head of British Land Co. Plc's £2 billion Canada Water development by London's River Thames, said the government's inaction was inflicting a financial and human cost.

"We are seeing excellent, world-class people working in the construction industry [who are] not from the U.K. making the decision to leave the U.K., so construction costs are now going up," said Madelin. "One of the first things the government could do is to say anyone with a job can stay and higher education can continue to attract overseas graduates."

"If we had strong leadership in this country, decisions like that would be made to allow people to get on with their lives," Madelin added.

Negotiations to decide the terms of the U.K.'s future political and economic relationship with the EU are set to begin June 19. The rights of EU citizens to remain in the U.K., as well as the rights of U.K. citizens to remain in the EU, will be among the issues up for negotiation. As many as 176,500 EU workers are employed in the U.K.'s construction sector, representing around 8% of the sector's workforce, according to the Royal Institution of Chartered Surveyors. RICS warned the government in March that the sector is at risk of losing all these employees if the country does not retain access to the EU's single market, which allows for the free trade of goods, services and capital.

The EU made it clear shortly after last year's Brexit vote that the U.K. would not be granted access to the single market if it failed to agree to the bloc's "fourth freedom," which is the free movement of labor. Immigration and foreign labor was a key issue in the Brexit referendum and is widely considered to have been the driving force behind the country's decision to leave.

U.K. Prime Minister Theresa May outlined in a speech in January the country's approach to its withdrawal from the EU, stating that it would not seek access to the single market or Customs Union — a position that has been dubbed a "hard Brexit." In April, May called a general election three years earlier than scheduled in the hope of securing a strong mandate ahead of her government's negotiations with the EU. The June 8 result saw her Conservative Party lose its 12-seat majority in the U.K. House of Commons the country's lower house of parliament and forced into an agreement with the 10-seat Democratic Unionist Party from Northern Ireland to secure support and continue on in government.

The U.K. government is now much less likely to pursue strict immigration controls on EU citizens, said Guy Grainger, CEO of global real estate services firm JLL's Europe, Middle East and Africa operations, during the panel discussion.

"The government won't be so stupid as to put complete controls on restriction against migration," said Grainger. "They will want some controls but it will be limited; it won't be absolute. I was amazed when Theresa May came out with some immigration [target] numbers. I found that completely shocking and it's not a surprise that she's ended up where she has as a result of some poor decisions during that process."

Real estate companies worried about the uncertainty created by the Brexit vote and the general election result should not panic when planning for the next couple of years as the deadline for the conclusion of exit negotiations set out in Article 50 of the Lisbon Treaty is likely to be extended, said Grainger.

"The first assumption you can make is that it won't be done in two years' time," he said. "In fact, there is a really high chance that it will be done in at least five or possibly seven years' time, in terms of knowing where we're going. So you've got a period of five to seven years where you've got to do some things. And you can plan for that."

Grainger also played down expectations of other European cities being the sole beneficiaries of businesses exiting London, as well as fears that London's position as a leading global city is under threat. "It's a nonsense to think that any one place is going to benefit and it's a nonsense to think that London in five to seven years' time will be way down the pecking order of the global cities," he said. "It won't be. It will have evolved."