OREANDA-NEWS. Fitch Ratings says the uncertainty created by the Brexit vote is likely to have a negative effect on Lendlease Corporation Limited's (Lendlease, BBB-/Stable) European operations. We believe that the UK's vote to leave the European Union may slow Lendlease's growth in the medium term as a result of expected declines in demand in the UK real-estate market. However, any near-term rating action is unlikely as Lendlease has the ability to conserve cash where needed.

Lendlease's strategic focus on global urban regeneration projects has increased its exposure to the London residential and commercial property markets, with buyers at major projects at Elephant & Castle and The International Quarter in Stratford due to complete payment for their homes over the next three to four years. At the end of the financial year to 30 June 2015 (FY15), around 32% of Lendlease's pre-sold apartment revenue of AUD4.7bn was from London-based projects, while the European operations contributed around 13% of FY15 EBITDA.

Fitch expects the uncertainty created by the Brexit vote to reduce demand in the UK residential and commercial property markets as foreign investors assess the markets' increased risk and banks are less willing to extend credit. Market estimates show the luxury residential property market has been the most affected since the Brexit vote on 23 June 2016, while the uncertainty has recently prompted some investors to exit commercial property-focused investment funds, leading to funds freezing withdrawals or offering withdrawals at steep discounts to net asset value to reflect the potential impact of having to sell the somewhat illiquid assets quickly.

Longer term, we expect residential property demand to continue to face challenges with fewer EU workers living in the UK and companies relocating employees, while commercial property demand is likely to be affected by fewer companies being located or headquartered in the UK. However, London's housing market may be partially shielded from any decrease in demand for new residential projects across the UK. The UK government and local authorities continue to address the well-flagged housing shortage, as well as the affordability of housing in the capital by implementing policies to support the construction of new properties. In addition, London's position as a major world city is likely to support property demand in the city compared with the rest of the UK.

We expect Lendlease's settlement risk at Elephant & Castle and The International Quarter to increase, particularly in the near term as uncertainty remains at its peak, but the capital gains made by buyers over the course of construction and the position of both properties outside the luxury market, as well as their proximity to central London and transport links, mitigates this risk. The popularity of both projects is evident, with over 90% of apartments at the two projects currently under construction and due to settle before the end of FY18 being pre-sold. In addition, the 20% deposit received on the pre-sales and the completion - and hence settlement - of the project in stages gives Lendlease flexibility to address any increase in settlement risk.

Lendlease has also reduced its exposure to the commercial property market at The International Quarter, having announced that in 1H16 it sold the first two commercial buildings in the project, which already have agreements for lease in place, prior to their completion.

The impact of the Brexit vote on Lendlease is likely to be more pronounced in the longer term as the company plans to expand its international urban regeneration project portfolio to offset a slowdown in the Australian property market. Lendlease requires 70% of apartments in a residential project to be pre-sold before it starts construction in the UK. Lendlease may take longer to meet these pre-sale requirements or postpone projects if demand in the UK residential property market slows down. This would allow Lendlease to conserve cash if needed, while it would negatively affect its growth rates and its ability to replenish its development pipeline as current projects complete. Nevertheless, government policies to address the housing shortage in London may provide Lendlease with opportunities to secure new projects.

We expect the impact on Lendlease's European construction business to be less than in its residential business, due to its smaller size and the flexibility Lendlease has to reduce the size of its business to address any downturn. However, we will monitor any potential funding implications for future projects as a result of the recent actions taken by commercial property investment funds in the UK.