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< UK: A hard exit for property?

Brexit has implications for real estate. Perhaps the UK should look at Canada’s relationship with the EU for inspiration, writes Michael MacBrien.

Many of the freedoms and privileges of EU membership are not recognised as such by real estate professionals but simply taken for granted in an 'open' and 'global' economy. Exit from the EU means the end of many of the most basic real estate investment and service provision freedoms, or at least putting them at the mercy of individual countries. It is possible for the EU and the UK to negotiate a treaty that could partially offset this.

The EU internal market is founded on four freedoms: free movement of capital, services, goods and persons. All four are crucial to property. The first guarantees the freedom to buy and sell real estate without obstacle anywhere in the EU. The second enables property professionals of all types to practice anywhere in the EU, with or without establishment and with their home country qualifications. The third enables free circulation of construction products and the fourth creates an open construction labour market framed by EU workers' rights. Exit from the EU ends all of this.

Free movement of capital in its broadest and common acceptance will doubtless remain unchanged, but obstacles to real estate investment can be expected to mushroom. For property purchase, it suffices to see how the Australians or Chinese control foreign property investment or how countless other countries let the investor in, but not out. Left to their own devices, Europeans should be no different.

The history of the EU is a long sequence of attempts to raise barriers to property investment, the will to control foreign purchase of land and buildings being a core nationalist reflex. Each attempt was stopped by the European Commission - sometimes at the behest of the European Property Federation (EPF) - or quashed by the Court of Justice of the European Union (CJEU).

There was one exception: the Danish held up the Maastricht Treaty until a protocol was added enabling Denmark to permanently control non-Danish purchase of secondary residences. But that was truly exceptional leverage in a union which otherwise is one big real estate emporium for EU citizens and businesses, while non-EU investors can be subjected to restrictions that are perfectly arbitrary or whose pro forma justifications cannot be countered without the Commission or the CJEU.

The most important obstacle to property investment may well be indirect, as part of a panoply of measures restricting service provision. Indeed, direct restrictions on access to real estate are often a part of the classic cocktail of obstructions such as requiring local qualifications, or a licence to operate, or requiring a joint venture with a local party, or restrictions on the legal form of the service enterprise, or putting a percentage cap on foreign presence in an economic sector, or economic necessity tests - all things that took decades of EU law and case law to overcome.

Public procurement will be another sea change. Under EU law, national and local administrations must have pan-European tendering procedures for projects that often are of direct interest to contractors, developers, architects, engineers and town planning consultants. Continental administrations will no longer be obliged to consider offers from UK-based companies, and conversely the British government will be able to reserve contracts for UK nationals as it once unsuccessfully tried to achieve for the now defunct English Partnerships brownfield redevelopment schemes.

Tariff-free commerce in construction products and real estate fixtures stops at the EU border, but WTO rules on such products may be enough to obviate this. The greater problem is non-tariff barriers. Today, these are often no longer erected with the specific purpose of protecting markets under bogus health, safety or environmental norms; national rules create obstacles by just being different. In other words, countries with comparable levels of consumer and environmental protection create barriers just by legislating in different ways. The EU obviates this via harmonisation of core law and mutual recognition of the rest, coupled with home country control of the manufacturer. This ends upon exiting the union. The construction business and its clients will need to factor in higher costs for the building blocks of the real estate economy.

The end of the free movement of people could be a positive for the UK property industry. It will be possible to hire European workers with no EU-enforced benefits and no right for the workers to stay in the country and seek other employment.

A partial, Canadian solution

UK membership of the European Economic Area (EEA) would preserve all four freedoms, but at a cost: acceptance of all the freedoms, movement of persons included; payment of a budgetary contribution almost equivalent to the cost of EU membership without many of its funding paybacks; transposition of new EU law into UK law without any power or vote over its making. All of this would play out under the control of a European Court devoid of British judges. The internal market is not static; all further advances will be imposed on the EEA.

The Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU is germane. It is a highly sophisticated 'second-generation' treaty that makes Canada the country with the closest relationship with the EU. Its modest provisions on free movement of people would be acceptable to the UK and many of its provisions are relevant to real estate.

It is not a template for EU-UK relations, as it is not a 'kit'; it's a detailed and complex treaty tailor-made for Canada and the EU, and it reflects nine years of hard negotiations, final skirmishes included. But it should be relatively easy to adapt this to the UK, a country currently totally in sync with the internal market.

The freedom to invest in immovable property is specifically covered by CETA. The provision specifically excludes limitations on the total value of transactions or assets. It cannot be compared to ironclad EU protection, and investment funds operating out of Canada have no EU 'passport'. But it is a major guarantor.

In the CETA negotiations, Canada converted the EU to 'negative' service lists, meaning that all services not specifically excluded are covered by the treaty's provisions. No service related to real estate is excluded. CETA only guarantees national treatment, whereas EU law enables service providers to operate in the host country on the basis of any home-country rules that have not been EU-harmonised. Under CETA, a party is still free to acquire a licence, membership in a professional organisation or a local agent, but this is still much better than nothing.

CETA empowers Canadian and European professional bodies to organise mutual recognition of qualifications, enabling all parties to practice freely on both sides of the Atlantic.

In an example relevant to real estate, The European Group of Valuers' Associations (TEGoVA) and its member the Appraisal Institute of Canada have already recognised their valuation standards and qualifications, an achievement that they can adapt to CETA. TEGoVA and its UK members could conduct a similar exercise that would largely preserve the freedom to provide valuation services between the EU and the UK.

For the free movement of goods, Canadian construction products can have the EU's CE conformity mark accorded to them by EU-recognised local Canadian certifying bodies working to EU specifications and vice versa. A similar agreement between the EU and the UK could preserve the free-flow of construction products.

Under CETA, free movement of persons is restricted to company personnel needed to complete a project or provide after-sales service. The UK should find that acceptable, especially as it may prove crucial to a UK construction or development company needing to send personnel to complete a project.

One of the ground-breaking achievements of CETA for both goods and services is a sophisticated procedure of 'regulatory cooperation', enabling the European Commission, the Canadian government and their respective economic and social interested parties to work on their regulation upstream, at the earliest phases of policy formulation, to avoid useless and unintended obstacles to trade. Transferred to EU-UK, this would be a promising way of ensuring minimum friction to real estate business down the line.

British property interests of all types will need to coalesce around 'access'. They will need to capitalise on their membership of European real estate construction, investment and service federations to keep British and EU real estate as porous as possible.

Michael MacBrien is director general of EPF, adviser to TEGoVA and a founding partner of MacBrien Cuper Isnard

First published in the January/February issue of IPE Real Estate