Brexit: is Prime Central London ready?
In a year when, understandably, conversations throughout the country have rarely drifted far from the coronavirus pandemic, it is easy to overlook the fact that the UK is going to leave its transition arrangement with the EU in fewer than six weeks, with or without a new trade deal. A subject that, from July 2016 until March 2020, was seemingly debated endlessly by everyone, suddenly dropped from the radar almost overnight.
But, with negotiations still ongoing with the EU, Brexit is an inevitability that cannot be ignored. We wanted to understand what its likely impact will be in the prime London residential construction market in which we work so intensely. So we spoke to a selection of our contacts and team-mates to canvass their opinions.
“While uncertainty remains over the terms of any Brexit deal many potential international purchasers are deferring decisions”
As far as the market is concerned, and perhaps against expectations, prime central London is currently being bolstered by pent-up demand, not just following the hiatus of lockdown but going back to 2016 when the uncertainty surrounding the fall-out of Brexit began. Many prime buyers who sat on their hands between 2016 and 2019 have returned to the market in 2020. But, for how long? Right now, while uncertainty remains over the terms of any Brexit deal (or no deal), and while travel is restricted, many potential international purchasers are deferring decisions, especially when it comes to second homes. In the meantime, however, there is the deadline on 1st April of the introduction of the 2% SDLT surcharge for international buyers so those with a higher risk appetite and who are able to act quickly could land themselves a last minute bargain.
But will post-Brexit London lose its appeal to some of the international HNWIs? Already many of the big US and European banks are relocating senior staff from London to Paris or Frankfurt – what impact will this have on the prime central London property market? Ian Bolt, Chairman of premium integration firm Custom Sight & Sound (CSS) observes that, if this drift towards the EU continues, their market will more than likely be adversely affected. However, as the financial market is only one of the many factors in London’s appeal for their clients, the extent to which it will be affected is impossible to know.
“One in five architects practising in the UK originally qualified in the EU”
From our own perspective, we expect the main impact of Brexit to be on our future recruitment of staff. Our team has for many years included a significant contingent from the EU and, while those already here have leave to remain, it is likely that end of free movement on 31st December will affect us when we are looking to recruit from January. Currently one in five architects practising in the UK originally qualified in the EU.
We spoke to recruitment consultant, Stewart Howl of Tarrant Howl, who has seen a healthy flow of candidates coming from the EU throughout his career. Will Brexit deter these people from wanting to come to the UK to work? It seems likely. Certainly, Stewart has already spoken to people in the architectural and design sector who are looking to return to their home countries having become disenfranchised with the UK.
“It all amounts to a lot of extra paperwork for HR departments”
For those that still seek work in the UK, what will the new rules mean for employers wanting to hire them? Well, before they can even look for talent from overseas, they will need to become a Tier 2 licensed sponsor. The influx of talent from the EU over the last 20 years means many companies have never needed to look further afield and so won’t be registered. The registration process costs at least £536 for a 4-year licence. Then, in order to sponsor someone, the candidate will need to satisfy the infamous “Australian-style points based system”, with points awarded for skill level, qualifications, grasp of English, occupational shortages etc. It all amounts to a lot of extra paperwork for HR departments. But will they have a choice? Can the UK alone provide the supply of qualified people that currently arrive from overseas, whether EU or beyond? I think we can all agree the answer to that is a resounding “no”. So we had better get used to filling in Home Office forms!
Stewart also notes that many of the EU candidates he has previously found roles for have managed to initially get their feet in the doors of employers via short-term agency contract work, Lees Associates being one of them. “The new rules will mean this will not be an option after January”, says Stewart, “as they will need to be sponsored by an employer and [The Home Office] have told me, as an agent I would not be able to sponsor someone; it has to be the end client”. And how many employers will want to jump through the hoops of sponsorship for someone on a short-term contract, especially smaller companies? As Stewart says, “it will be interesting to see if companies have the appetite to take on people directly and I’m sure many will not have applied yet to become a licensed sponsor, which will cause delays when they realise they need this”.
For anyone wanting to learn more about sponsorship and how the points system works, Stewart has written an excellent article that covers everything you will need to know.
“Sixty per cent of the construction materials used on UK projects are imported from Europe”
Sixty per cent of the construction materials used on UK projects are imported from Europe, but main contractors are finding it incredibly difficult to make any meaningful plans. Chris Butler, MD of Walter Lilly, currently fitting out a penthouse in Belgravia with Lees Associates, says “until we know the facts, it is unlikely that we will make any permanent changes. We are talking to our supply chain who we perceive are going to have the hardest time with the change”, a sentiment echoed by Phil Cheevers of Cheevers Howard, who are also currently delivering a Lees scheme. Cheevers Howard are looking at their contract suite and their procurement policies to make any necessary adjustments that will identify when Brexit risks crop up and how to deal with them. They will also review tenders and isolate out certain packages that may be effected by Brexit at the earliest stage.
“Brexit clause”
On tendering, Chris notes that Walter Lilly are now requesting for a “Brexit clause” to be added to the amendments of building contracts. “The amendment is written so that we are not liable for time or money in relation to the fall out of Brexit. We will continue as we have always done, working in line with UK and European legislation. What we don’t know right now is what that legislation might look like”. Most of Walter Lilly’s clients have agreed to add an amendment in one way or another.
It remains unclear what programme implications there may be in bringing materials into the UK from the EU from January 2021 and what price increases there may be in either materials, importing or taxes and fees. For projects that are current on site, Chris reports that Walter Lilly are doing their best to protect clients and themselves by reviewing all materials that they need in the foreseeable future that are being delivered from the EU. “We are trying to procure, manufacture and have delivered as much as we can prior to the end of 2020. As you can imagine this is harder than it sounds. We have clients that do not want to make early decisions and designs that are not advanced enough to make that happen.” In those cases they will be relying on the contract amendment. They have other clients who have moved everything forward to avoid the implications of Brexit.
As both Chris and Phil have said, it is their supply chain that will feel any impact first. We spoke to two premium joinery companies to get their thoughts and were pleased to hear notes of positivity from both: Bernd Radaschitz of Interior-ID & Lansserring is optimistic that they won’t be too badly affected, despite their factory being in Austria. “If there were any customs it would be very minor, if any at all, and if it was under WTO rules there would be zero percent customs on furniture”. He goes on, “but since there will be an extension around custom matters until 1st July 2021 we don’t feel pressurised just as yet”. That will come as a relief to some. Richard Miller of Halstock sees the main threat to his business as travel and supply interruptions but is confident that it will be nothing the market will ultimately not be able to sort. “If we maintain core integrity, process, behaviours and structure then we should be alright.” However, in part as a reaction to Brexit, Interior-ID & Lanserring are branching out, including to NYC next year, in addition to limited growth in the UK market..
“Everything hinges on the deal”
Meanwhile, Martin Corton, artisan floorist at Rainleaf, who source most of their timber from Germany, strikes a less optimistic note: “Everything hinges on the deal”, he says, “If we have WTO tariffs our adhesive and sub floor prep costs rise 7% immediately. As yet there’s nothing we can find [to suggest] WTO tariffs hike the price of engineered flooring or solid wood flooring”. Martin is already seeing signs that ports are clogging up with companies trying to avoid getting levied with possible tariffs for goods that would have arrived in January. It seems likely then that all imports, including those from China, will be hit with serious delays for the first 6 weeks or so of 2021 at least, possibly longer.
Martin also makes another interesting observation: due to the huge reduction in planes carrying passengers, there has been a phenomenal uptake in air cargo freight, with costs coming down in order to keep planes in the skies. “We have one client that has opted for air freight of their floor to NYC rather than shipping”.
One of super-prime London’s leading lighting designers, Xavio, have been busy discussing preparations with the UK lighting supply industry, including encouraging them to building up buffer stocks. Indeed, one lighting manufacturer will have their highest level of inventory in their 136-year-old history by the end of November. Likewise, Ian Bolt reports that the majority of CSS’s distributors have already increased stock-holding to cushion as much as possible any import delays. He adds “the majority of the equipment that we use is from the US or the Far East and therefore duty increases will also be unlikely to cause issues – very little of the product used by our industry is produced in the EU”.
Xavio are also planning to ensure that the products they specify conform with regulations to be used both in the EU and outside and they are getting to grips with the additional paperwork that will need to be completed from January. And it is this extra paperwork that concerns many of our commentators: how quickly will it be processed; will there be a backlog? And how much delay is it likely to cause? Nick Reynolds, MD at Xavio, notes that “there will some major changes in processing of accounting data, in particular relating to VAT/Intrastat and the returns made to HMRC. The ‘Economic Operators Registration and Identification’ (EORI) process and the potential to require Fiscal Representatives/Agents depending on the countries that lighting goods are exported to, and these arrangements are still to be confirmed by individual countries within the EU27.”
Despite the anticipated lengthened lead times due to border checks etc, Nick remains confident that Xavio will be able to help main contractors to maintain overall project programmes due to their careful specifications and intensive management of the procurement process on their many high-end projects. But he cautions that a no-deal scenario would cause a large increase in the amount of administration for importing/exporting from the EU so he is keeping everything crossed that a trade deal will be reached with the EU.
“Clients at the highest end of the market will always pay for what they perceive to be the very best in quality”
For Martin, there has been very little he has been able to do in preparation other than warn clients who have placed orders that delays may be probable and a tariff maybe payable. However, looking at the bigger picture, Martin believes that for Rainleaf, and for other specialist trades, the overall effect of Brexit will be minor: “Clients at the highest end of the market will always pay for what they perceive to be the very best in quality”. We couldn’t agree more.
What about companies exporting to the EU? Nick Reynolds says that this depends on the service offered. “Goods can either be delivered ‘DAP’ (Delivered at Place) or ‘DDP’ (Delivered Duty Paid). DDP will require lighting providers to gather all the information on commodity codes and tariffs for goods being exported and including this in the costs to the customer. DAP will be similar in process to many recent projects in that suppliers will price for delivery to site but not include any payment of tariffs/duties required on the receiving countries side”. Based on the current guidance, Nick believes that after Brexit the DDP option will offer a much better customer service but it would increase costs and administration time. “This could affect the internal resources required and/or increase requirement for employing customs specialists”. Of course, there will be extra paperwork either way.
The over-riding message we received from these conversations was “we just don’t know”! But we think everyone can agree that the sooner there is certainty one way or the other, the sooner and the better companies can properly prepare. The government are campaigning to encourage all businesses to be prepared by 31st December but until we know what we are preparing for exactly that is quite a challenge.
Nick Reynolds remains positive: “One way or another, the world’s leading super-prime residential sector in the UK will overcome whatever hurdles Brexit puts in our way, and we will maintain our flexibility to manage this”.
The final word goes to Martin Corton: “I think on the whole we are just going to muddle through it.” It looks like we won’t have much choice! We are keeping everything crossed a deal can be struck in the next few days so we can all get on with it…
In the meantime, we have found these conversations with our colleagues in the high-end market very helpful and, on the whole, reassuring. For ourselves, we can happily say that, as one of London’s leading prime residential and luxury hospitality Architects, we do not anticipate the fall-out of Brexit affecting our position in that market.
We would love to hear your views on the subject: what are you doing to prepare for 1st January and how do you see it affecting your business in both the short and long terms. Please let us know in the comments below.