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I think that it is telling that the Brexit campaign is so reliant for its funding from elements of hedge fund and spread betting industry.
There are two reasons why this corner of the investment management world is attracted to a leave vote. The first is that it sees opportunity in volatility. Money can be made on collapsing as well as booming markets. What is harder if your objective is to make huge gains on sudden movements and pricing dysfunction is to make money in stable markets. As mentioned above, the real estate industry, along with large swathes of the investment management industry, generally prefers stability and long term economic growth. This is probably true for most people outside the bubble of the financial services industry too. More on that below. The second attraction for the hedge fund industry is a naïve belief that an exit would allow it to operate entirely outside the constraints of European Union regulation, in particular the EU Alternative Investment Fund Managers Directive (AIFMD). Whilst the Directive has major flaws, it is not going to disappear, and how it will apply to non EU based managers after 2018 is at this stage unclear. Exiting the EU is extremely unlikely to be the unregulated nirvana that some hedge fund managers anticipate.
From the the perspective of the real estate investment management industry, there are a number of major concerns if the UK exits the EU:
a) We are already reaching the peak of the UK market in terms of yield compression. The focus going forward will be on rental growth. A self-inflicted post Brexit recession would be extremely unhelpful;
b) Specific industries that are highly dependent on EU membership, for example banking and the mainstream investment management, may well relocate significant parts of their business to other locations in the EU. A relocation of financial services businesses to Frankfurt, Luxembourg or Dublin will also have an adverse impact on London rents.
Although other parts of the UK are also likely to suffer in the event of an exit from the EU, it is London that will face the greatest impact. It is astonishing that our recently ex-Mayor of London is leading the Out campaign. He does not have the typical physique of a contortionist, but has displayed a breathtaking ability to adopt an array of different and implausible positions;
c) The real estate investment management industry is hugely dependent on the global flow of capital. Although the AIFMD has not, at least yet, brought the marketing advantages for alternative managers that UCITs has for mainstream managers, it would be worse to be on the outside. This is an extremely important consideration. Financial services companies doing business within the EU still have to comply with much of the regulation. That regulation would be significantly more painful without British influence in the process. It is an area where the UK has contributed significantly. Sharon Bowles MEP was the highly effective Chair of the EU Parliament Economic and Monetary Affairs Committee from 2009 to 2014, a critical period for the introduction of much of the financial regulation with which we now live. Whilst people may grumble about the burden of compliance, please cast your minds back to the period after the global financial crisis. Politicians were under huge popular pressure to punish and emasculate the financial services industry. Although it might be painful, we have ended up with something that does broadly work and over time is likely to get better rather than worse. Sharon Bowles' contribution to this should not be underestimated. The appointment of Jonathan Hill as EU Commissioner for Financial Stability, Financial Services and Capital Markets Union has also been positive and was achieved in the face of significant opposition (being something of a Euro nerd, I listened to the appointment hearings). The progress on the Capital Markets Union is a positive sign, and shows what can be achieved when the UK takes a leading role on the pitch rather than standing on the side-lines griping.
