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Brexit vote defeat tests confidence of international investors in UK property

International investment in U.K. property is likely to slow further following the failure of the government to win sufficient support in Parliament for its deal on the terms of the country's withdrawal from the European Union, according to a leading capital markets expert.

Prime Minister Theresa May's government lost by 230 votes as dozens of members of her own Conservative Party joined opposition parties in rejecting the deal she had struck with the EU.

Andrew Thomas, head of international capital markets for London offices at real estate services firm Colliers International said that a lot of investors willing to deploy significant capital in U.K. property had held off investments prior to the vote. With the prime minister's deal now seemingly dead, the lack of clarity around the final terms of the U.K.'s exit from the EU means investors are more reluctant to enter the market.

"Until there's some formalization of the process, there will be quite a significant number of investors that will just wait," Thomas said in an interview. "Everyone's worried about being penalized for an early move — and if you don't have to do it, why do it? There's a safety-first mentality, and last night's vote will just enhance that."

International investment in U.K. commercial property cooled in 2018 following a record year in 2017. Overseas investors accounted for approximately 50% of total investment in U.K. commercial real estate in the first three quarters of 2018, according to data from real estate services firm CBRE, down from about 70% of total investments in 2017.

Thomas said that investors such as those from South Korea, who were among the largest investors in U.K. property in 2018 with £1.1 billion invested in the first half of the year alone, were likely to "pull back" until there is a bit more stability. South Korean investors, who often resell the property they purchase in the U.K. to secondary buyers in South Korea, will be reluctant to pass on any heightened risk arising from the Brexit uncertainty to other investors in their home market, Thomas said.

Mario Berti, CEO of real estate lender Octopus Property, which lent £800 million to the U.K. property sector in 2018, said the defeat of the Prime Minister's Brexit deal would impact domestic and international investors alike. "While forecast, the size of the defeat is a real blow to the U.K. real estate sector," he said in a statement. "While a lot of the uncertainty caused by Brexit has been priced into the property market, this result is likely to lead to even more reluctance among real estate developers and investors to move forward with their U.K. real estate strategies, which will negatively impact the whole sector."

Meanwhile, Melanie Leech, chief executive of the British Property Federation, warned against the prospect of the U.K. leaving the EU without a deal. "It is critical that the government avoids the disruption and uncertainty posed by no deal," she said in a statement. "Leaving the EU with no withdrawal agreement would be harmful to investment and the property sector's ability to deliver new homes, support economic growth, regenerate towns and cities and help increase productivity — all benefits to people and businesses across the U.K. that the sector is keen to contribute."