With Brexit looming, can the Swiss model provide answers for the Real Estate & Construction sector?

Despite the prolonged uncertainty surrounding post-Brexit arrangements, investment in the real estate and construction industry has not stalled, with only 14% of the UK businesses in the sector putting their investment on hold.

Overseas investors still see the UK real estate market as an attractive destination, while being wary of the currency risk. The outcome of the Brexit referendum resulted in the pound plunging from $1.48 to about $1.23 at the end of 2016. The decline was not only against the dollar but also against other currencies including the Swiss Franc where the pound from 1.53 to 1.19. There is a possibility that leaving the EU will have a negative impact on the UK’s trade position, prompting a further decline in the broader currency value.

The pound’s post-referendum depreciation has been caused by the lack of clarity on the kind of deal Britain will be able to negotiate with the EU post-Brexit and the future of its economy because of that, even though the situation of the UK post-Brexit is not unique. While no other state has exited the community, there are countries that coexist being surrounded by Europe, including Switzerland.

The Swiss-style agreement consists of over 100 bilateral treaties with the EU is one of the potential routes discussed within Whitehall. The appeal of this model is apparent – the UK would benefit from having access to the EU’s single market in some areas of trade via free trade agreements with the bloc. It will be able to maintain a degree of autonomy while making relatively small financial contributions to the EU – one of the main sticking points of the UK-EU debate before the referendum.

While Switzerland has signed up to the principle of freedom of movement of people, it has recently introduced restrictions on the number of workers from Bulgaria and Romania as well as limiting access to particular trades. The UK government’s current plan to introduce mandatory residence permits, limiting the time low-skilled EU workers can remain in the country, mirrors the Swiss approach to migration.

Assuming a series of bilateral deals with limits on migration is put in place, the UK construction and real estate sector might still suffer.

In Switzerland, there was a sharp decline in migrant workers, following the Swiss federal popular initiative "against mass immigration." The referendum was designed to limit migration from the recently joined EU states and had a substantial impact on the real estate market, especially in the rented housing sector - on which thousands of workers rely. The effect is still clear more than four years later in increased vacancy rates.

In addition, the shortage of skilled labour from abroad may prompt increases in wages, which will be borne by companies or, more likely, passed on to buyers, affecting the number of completed projects and making the overall sector less desirable from an investment perspective. EU migrant workers currently account for around 15% of low-skilled roles in the UK, and new restrictions could see this number drop over the next few years.

Negotiation in the bilateral treaties may further be cumbersome.  The Swiss deal took nine years to negotiate, creating a period of protracted uncertainty, and the same could happen in the UK, negatively affecting the nation’s economic performance across multiple sectors, spooking investors and skilled professionals in high-paying jobs.

The future remains ambiguous, but it is clear that the UK’s situation while different from that of Switzerland, given the size of its economy and population, as well as higher tax rates bears some similarity. With freedom of movement being one of the conditions for accessing the single market, the UK is set to face a significant backlash in Brussels, while real estate investors expectantly await a resolution.