After last Friday’s surprise Brexit vote, we are now entering a period of increased market volatility as property investors and occupiers absorb the developing news and begin to review and adjust business and investment strategies.
In this uncertain environment, we are expecting the UK property investment market to continue to experience a slowdown over the coming months, until the political and economic landscape becomes clearer and more stable.
While the road ahead to the UK’s exit from the EU and subsequent trade negotiations with the rest of the EU and the rest of the world are unlikely to be smooth or easy, not every UK property sector will be impacted in the same way. This is likely to lead to a market of ‘winners’ and ‘losers’.
The City and Canary Wharf office markets are expected to be the most vulnerable to Brexit, due to the high concentration of international banking and financial services occupiers and questions about continued access to the EU’s single market. There will also be uncertainty created around the issue of whether ‘passporting rights’ will continue to operate for banks with HQs in London, which currently trade in other EU countries without having to have a physical presence there. This may cause some international banks and financial services companies to move some operations out of London into other major European cities, thereby reducing demand for office space.
Other markets are more defensive, such as regional office, industrial and manufacturing markets – where the business and customer base is more domestically-oriented – as well as prime regional retail centres.
Some markets and sectors may actually benefit from the Brexit-related fall in the value of the pound – such as London luxury high-end retail markets, as well as some leisure and tourism-related sectors – as foreign shoppers and tourists take advantage to buy luxury goods cheaper than at home. Manufacturing markets, which rely on exporting to the rest of Europe, will receive a temporary boost from the cheaper pound and potentially lower interest rates. However, this will be counteracted to some extent by a slower economic environment, higher inflation and weaker demand for goods.
There may also be an increase in foreign buyers looking to buy high-end London residential property – with a cheaper pound, less competitive demand and continued very low interest rates.
The UK property market will inevitably recover over time, as the economy becomes more stable, interest rates remain low and the supply/demand fundamentals remain strong. The sector benefits from long leases and higher income returns than other asset classes. The London investment market has many attractive characteristics – such as being one of the largest, most liquid and transparent markets in the world – as well as being in the optimal time zone between the US and Asia. In addition, regional markets offer diversification benefits and better value.
UK property markets will undoubtedly be impacted by short-term market uncertainty and volatility, but over the long term they are expected to bounce back.
Past performance is not a guide to future performance. The value of investments can fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance.
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