The extent of the Brexit uncertainty for real asset investment

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

The decision of the UK electorate to leave the European Union has ushered in an historic period of political and economic uncertainty. This is an introduction to our series of briefings on "Brexit issues" for investors and managers in the real assets industry. Below we give our perspective on some of the general uncertainties and possible opportunities that colour the dawn of this "brave new world" for our sector.

The extent of the economic uncertainty

The current political and economic uncertainty will stabilise in time. The UK has so many inherent advantages and too much relevance in the global economy to be set aside. Quite aside from the scale and liquidity of the UK's real assets market, the UK has its time zone, language, international position, very long traditions of robust yet practical regulation, a strong legal framework, business pragmatism and an entrepreneurial culture.

In the long term, the UK will probably want to reduce "red tape", increase competitiveness and enhance the country's attractiveness to overseas investors.

There are also immediate potential opportunities whilst the pound and markets settle. Acquisitive global investors with enough dry powder and the ability to move fast may be able to execute some appealing real assets deals.

The regulatory uncertainty is overblown…

EU law and regulation is part of the UK's indirect real assets investment environment. It is highly likely, on the current trajectory, that there will be a wholesale review of EU-derived UK legislation at some point. This unarguably introduces significant regulatory uncertainty for investors and fund managers.

However, the legal and regulatory status quo will apply in full until the UK has formally left the EU. Existing EU rules will still apply in the UK, and the following will come in to force:

• any Regulations implemented by the EU between now and a formal EU exit (Regulations have direct effect and apply automatically in the UK);
• any new Directives that can be transposed into UK law within the limits of the eventual exit timetable; and
• any relevant decisions of EU courts.

The confusion of no law is potentially damaging, which means that even after the UK's formal departure from the EU, the existing rules may remain largely in place in the near to medium term. We may also see the UK transpose existing Regulations directly into UK law, at least during any transitional period.

...but there are indeed serious challenges

Still, real assets investors and managers, like any other businesses, need to plan as much as possible, and it remains crucial to identify and track the issues before they become problems. Below is just a handful of example areas where deviation from EU law may affect real asset investment structures:

• Regulation – to what extent will UK real asset managers achieve “third country” access to European capital under EU directives like AIFMD and MiFID (II), and will the UK continue to implement or perhaps deviate from regulation affecting investors, such as Solvency II and the IORP Directive (see also our Brexit briefings on financial services and investment managers)?

• Tax – Brexit may mean that UK entities no longer benefit from favourable EU Directives. Will UK funds face withholding tax of up to 20%? Or will the UK’s Double Tax Treaty network be able to mitigate these tax consequences?
• Employment – how quickly and how far might the UK change EU employment rules, such as TUPE?
• Competition – to what extent will the Competition & Markets Authority deviate from EU rules that mean large scale real asset joint ventures sometimes require clearance?

Of course there are many more issues, and we will be briefing you on on-going legal and regulatory developments in these and other key areas over the coming weeks, months and years as new issues are teased out and greater certainty is ultimately achieved.

Challenges come with opportunities

Please get in touch with the authors or your usual Nabarro contact if you would like to talk through the challenges and opportunities that the shifting new landscape might present for the real assets sector.