Brexit : Insights for the Real Estate Sector in the UK
Following the UK’s landmark referendum decision to leave the European Union, real estate investors have been dealing with the push and pull of post-Brexit market sentiment. Initial panic surrounding the outcome of the vote saw a raft of UK-based fund managers suspend redemptions from property funds worth £18bn[1] as investors looked to exit the asset class. Confidence in the residential sector also took a hit. Although as the dust begins to settle, forward looking indicators look a little less gloomy, with twelve month price and sales projections nudging back into positive territory[2]. For UK commercial property, the picture looks less rosy with Q2 2016 showing a significant deterioration in market sentiment visible across both investment and occupier sides of the market with uncertainty pushing rental and capital value projections into negative territory[3].
While it’s still early days to come to concrete conclusions on how the UK’s Brexit decision will impact the real estate sector, in a series of blogs our global real estate experts at Mazars have mapped out important considerations when assessing any challenges and opportunities likely to face strategic players, partners and competitors in the international real estate sector in four global locations; the UK, Germany, France and the US. Our first stop is the UK.
Demographic and social changes set to shape UK property market
There are number of factors that are going to pull the UK property sector in different directions over the next few years. While the appetite for commercial property has clearly been dampened following the Brexit vote, prime shopping space, such as London’s West End, is likely to maintain values and command good returns. This is being helped by the record numbers of overseas visitors to the UK taking advantage of the fall in sterling. However, while new buildings such as the Shard and the Walkie Talkie in London are expected to retain high occupancy levels due to their landmark status or because they are more state-of-the-art spaces, there may be pause for thought on other large office developments until major overseas institutions have placed their cards on the table regarding plans to downsize or relocate operations within the EU.
In terms of the residential market, there’s still a lack of supply in prime locations such as central London as owners hold back from selling up until they have further clarity on the vote’s impact. Indeed, if there is an ease from mainland Europe nationals coming to live and work in the UK, they are likely to be replaced by more historical sources of migrant workers from the Commonwealth countries such as Australia, New Zealand, South Africa and India which, again, will provide support for the residential property market. The preference from millenniums to move to city centres enabling them to work and socialise in the same area will also help to prop up major city residential prices, but this is likely to be at the detriment of smaller towns and villages. The outlook for prices in the most attractive areas therefore still look attractive with any more significant correction in values likely to come from a general economic downturn rather than being directly affected by Brexit issues. Looking longer term, clients will need to factor in demographic and social changes currently reshaping the UK property sector. Increasingly, jobs will be pushed out into the wider UK economy as IT connectivity improves the ability of more people to work remotely and the growth in online shopping will have a big impact on commercial property strategies. This is likely to provide new opportunities for property investors, particularly in growth sectors such as self-storage as businesses move increasingly online and re-quire more goods’ warehousing and lower cost service centre facilities. So while Brexit will provide short term challenges for the property sector, over the long term it will be social and demographic changes that will ultimately have the biggest impact.
[1] http://www.bbc.co.uk/news/business-36783428
[2] Residential Property Survey 18/6/16 from the Royal Institution of Chartered Surveyors (Rics)
[3] Commercial Property Survey 20/7/16 from the Royal Institution of Chartered Surveyors (Rics)
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