Brexit means Brexit, or so we’re told. But what does Brexit mean for the property market? Since the UK’s vote to leave the European Union (EU) on 23 June, investors in real estate have succumbed to a fair bit of panic. Listed real estate companies have fallen in value, property funds have been forced to suspend trading, and we’ve seen properties sold within the near-record period of a week and the cancellation of some major deals. Capital values fell by 2.8% overall in July, but City offices were hit harder, with a decline of 4.2%.1 Investors in property funds have reacted more adversely to the Brexit vote than they did to the global financial crisis. But is any of this actually warranted?
The first thing to note is that all the negative sentiment is driven by uncertainty, not by a considered assessment of the post-referendum realities. There’s a good reason for that: we don’t yet know what those realities will be. So we shouldn’t get too caught up in the short-term reaction to the vote. After all, many investors fled from UK equity funds too – something that most will now be regretting given the performance of the FTSE over the past couple of months.
A second observation is that while fund investors may have panicked, the watchword for businesses has been caution. Companies don’t want to commit to recruitment or expansion until they have more clarity – and that particular commodity has been in precious short supply since the referendum. So we expect a prolonged slowdown and subdued rental growth. But the rush for redemptions that forced investment funds to suspend trading doesn’t really reflect the reaction in the business world. Here, it’s been much more of a case of ‘wait and see’. We think that that’s a much more appropriate response.
Third, the declines that we’ve seen so far have been unevenly distributed. Offices and the City have been hardest hit, while industrial and logistics properties have held up better. London offices were already looking overvalued before the vote, however. And the City is subject to some of the most pressing concerns following the Brexit vote – not least the question of whether UK financial companies will continue to enjoy the ‘passporting’ rights that currently allow them to sell their services in the EU. But the London office market is unrepresentative of the UK property market as a whole.
After its initial post-poll spasms, the market now seems to be settling down a bit.
All that said, after its initial post-poll spasms, the market now seems to be settling down a bit. Trading volumes have been subdued, and this is likely to continue in the near term, at least until we have more clarity as to what form Brexit will actually take. But there will still be plenty of economic activity in which property will play a major part, albeit most likely at a lower level than in recent years.
As many property assets were trading at prices well above their long-term sustainable value in the run-up to the EU referendum, and as the post-referendum falls in capital values have so far been modest, we have yet to see prices fall to truly compelling levels. For foreign buyers, though, the picture may be different. One clear consequence of the Brexit vote has been the plunge in the pound, which fell to 31-year lows against the US dollar in the immediate aftermath of the result. The pound’s weakness magnifies the attractions of lower capital values for overseas investors, and this may lead to a pick-up in foreign buying. Despite all the uncertainties over Brexit, the UK will still be attractive to foreign investors, given the transparency of its legal and regulatory environment and the clarity of its transaction process. Another consequence has been the tightening of gilt and cash yields, which must again bring property into consideration for those who need income.
Meanwhile, most expectations are for the UK economy to avoid recession. The first hard post-Brexit data (retail sales and unemployment) has been surprisingly strong. And there are still positive trends in various parts of the market. The rise of online shopping continues apace, for example, and this is supporting values and rents in logistics and warehouses.
And – as ever – there will always be a wealth of individual opportunities for those prepared to look hard enough. Investors are too often guilty of thinking in aggregate – of concentrating on sectors and segments instead of the qualities of individual assets. Not all office buildings are alike. Nor are all warehouses, logistical centres or industrial sites. And it’s by recognising and enhancing the idiosyncratic opportunities in undervalued assets that property investors can hope to prosper –whatever the Brexit-induced weather.
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1Source: IPD monthly index, July 2016