Industrial/Commercial Property Market Generally Resilient Despite Uncertainty Over EU

Funny thing debt. Well not so funny if you live in Venezuela or even Greece. We have to keep a watchful eye on our own but generally as we age so our own balance sheet improves and debt taken early in life dilutes with the effects of inflation, wage growth and is eventually paid off. But a traditional 25 year mortgage seems now to be pushed out to 35 years and if you want a mortgage at 60 or beyond you can get one.

So we all (well most of us) live with debt and that includes the country.

A great deal of time has been spent on what we will have to pay to the EU for our Brexit divorce bill. One man’s billion pounds is as much as the next man’s. However, whatever the eventual bill the parameters now seem set around £35-40billion. It is, though, to some extent meaningless; and what’s more always has been.

We paid off the last of 50 instalments of £21billion of WWII debt to the USA (£45.5million) and Canada (£11.6million) in 2006. Effectively a 6 decades loan.

We haven’t, nor will we ever, pay off all WWI debt (£2billion). What remains is called Perpetuals and pays interest at 3.5%.

In fact, because of refinancing older debt, some debt repaid in 2015 goes back to consolidation of the capital stock of the South Sea Company which had collapsed following the South Sea Bubble financial crisis of 1720.

(Interestingly Germany had its WWII debt written off in 1953, – the Allies not wanting to make the same mistake as was made after WWI, – with deferred interest of €125m paid off on unification).

The actual amount is, of course, important but must be put in context of GDP which last year was £1.94trillion, with tax revenue of £730billion. £40billion is around 2% of GDP and 5.5% of tax revenue.
In other words, and whilst not wishing to be flippant with our rising deficit, when the negotiations on what we pay to the EU are concluded the debt will probably be paid over decades and be little felt.

So why all the hand wringing and angst over the specific amounts? Politics of course and nothing more. Mr Juncker has to show the Southern and Eastern European, generally poor and in some instances insolvent, States, that he has toiled and stretched the UK to busting before agreeing this amount and Mrs May has to show the ardent Brexiteers that she has got away with paying a minimum in this divorce. The actual amount at a practical level is actually secondary. What the Government are far more concerned about, or should be (and is the elephant in the room), is the effect on financial services and jobs in the City. What’s more we all should be with the tax raising done in the square mile. None of the major banks or institutions have actually abandoned London but some will if negotiations concerning the “financial passports” are not addressed quickly. The potential annual tax revenue loss there could put the divorce bill into stark relief.

What is depressing is that the uncertainty and lack of progress up to this point need not have been so slow with the inevitable uncertainty that has followed if the divorce bill had been agreed in principle earlier. To have agreed it quickly, however, would have been politically unattractive or even unacceptable.

Whilst we have our own intra UK political hurdles to negotiate (what fun the Irish border) the intra EU politics of the 27 other countries makes ours look easy.

It is ironic that despite the uncertainty, the regional property market in the industrial/warehouse sector has proved remarkably resilient. Town centre retail is suffering but for different reasons (Amazon has a turnover of approximately £1trillion, around 50% of UK GDP) and must find its own new future whilst offices are experiencing lumpy demand depending upon particular locations and buildings.

Of specific importance to our region, and particularly Huddersfield, will be the Department of Transport decision on the Trans Pennine Rail Upgrade which will be made in Q1/Q2 of 2018 which has the potential for transforming our area putting Huddersfield within 20 minutes of Manchester.

2018 will, therefore, be a very important year in which economic and political events will shape our future. But at the Brexit level I think we have 12 months of uncertainty to come because, like all things European, it will be finally agreed with a pre-dawn dash to the continent following overnight last minute negotiations.

What theatre!
Mark S. Hanson BSc FRICS
12 December 2017

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