Life’s just, well, uncertain

A general election will be held in the United Kingdom on May 7. The outcome is too close to call. We are in margin-of-error and the vagaries of voter registration, weather and turnout territory. Another coalition government is possible, but quite who the coalition partners would be is simply speculation. Months of negotiation could lie ahead. An outright win is also possible but is unlikely.

It has crossed a few people’s minds that this could be a good election to lose. This year’s loser could be a shoo-in in 2020.

We shouldn’t rule out a grand coalition of the two main parties, Conservative and Labour. Stranger things have happened, and they are not that far apart on the policies that matter — foreign policy, defense, health, austerity. Yes, really. In a seven-way televised debate between the leaders of the parties on April 2, Natalie Bennett of the Green Party referred to the two main parties’ policies as “austerity heavy” and “austerity light.”

On taxation, though, there is clear blue water between the two parties — Labour, with the “rich” firmly in its sights, wants to introduce a mansion tax on high-value residential properties, raise taxation on higher incomes, abolish the fiscal privileges of non-domiciled status, increase company taxes and “revisit” taxation on carried interest. Private equity real estate investors and managers — be afraid, be very afraid. The Conservatives want people to keep more of their own money, especially when they die; for the state to do less and to spend less. Labour also wants to limit rental increases on residential properties to consumer price inflation (currently 0.0 percent), which could snuff out institutional investor interest in the U.K. private-rental sector.

A German-style grand coalition solution to government would bring the merit that those pesky small parties on the left and right, and in the west and north, are not able to bring their nefarious negotiating skills to the table. Remember — the United Kingdom runs a first-past-the-post voting system; it does not have proportional representation, and there is no 5 percent vote threshold for small parties. And some of those are single-agenda or single-nation independence parties that may gain only a few seats but would be sure to exact a high price in any power-sharing or minority government–support arrangement.

The markets are not liking the uncertainty that the prospect of a hung Parliament and lengthy coalition discussions brings. The British pound has come under pressure in the foreign exchange markets, though not as much as the euro. The FTSE 100 Index may have hit a record high recently, but how much higher could it be if there weren’t this uncertainty? British government bond yields are holding steady for now, but it is unclear what may happen. U.K. property markets, with an enticing yield premium, remain attractive.

The United Kingdom, with its national debt and budget deficit at continuing high levels, could remain a thorn in the side of the European flesh. It’s a bit like the exasperated Mother Abbess in The Sound of Music: “How do you solve a problem like Maria?”

What does all this mean for Europe? Europe has problems, we know, but we don’t know whether the main problem facing Europe at present is Greece, Russia/Ukraine or the United Kingdom. We have an idea — especially in a period where Greece’s continuing reluctance to knuckle down to what its creditors want the country to do is once again rattling the world’s financial markets — but, until we know the outcome of the U.K. election, we can’t know.

We don’t know yet if an in-out referendum in the United Kingdom on continued membership of the European Union — as promised by the Conservatives — is a realistic prospect, let alone what the answer would be.

We don’t know whether Europe, inside and outside the European Union, will breathe a collective sigh of relief that the United Kingdom problem is “solved,” if the Conservatives fail to win outright, or give another gasp of anguish when the pain is prolonged, if they do.

What does all this mean for European real estate markets? We don’t know that, either.

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RichardFlemingRichard Fleming is editor of The Institutional Real Estate Letter – Europe.