Brexit to test the UK markets
With the UK’s deadline to leave the EU just over three months away, all eyes on the UK real estate market and how it will behave when – or if – Brexit becomes a reality next year.
There is a general consensus that returns and capital values will weaken in 2019, but the degree to which is unknown. The uncertainty has pushed some investors into two distinct camps: those avoiding the market full stop, and others are preparing for opportunities that arise from the anticipated disruption.
The latest consensus forecast published by the Investment Property Forum (IPF) shows most investors expect, on average, returns to slow and capital values to move into negative territory.
According to IPF, the commercial real estate outlook for 2019 is weaker for most markets, with the exception of the industrial sector.
Total returns are expected to drop from 6.2% this year to 3% in 2019, while capital values will fall across all sectors – except for industrial where they will rise by 2.7.
Capital Economics agrees and says a gradual upward movement in yields over the coming years is expected to result in returns slowing further.
“Despite this, neither us, nor the IPF Consensus, expect the commercial property sector to experience a hard landing,” the economic research consultancy says.
“Despite the risk of a no-deal Brexit, the central view of both us and the IPF Consensus is that the commercial property sector will experience a soft landing.”
In fact, even under a no-deal Brexit, Capital Economics expects values to only fall by between 5% and 9% over two years.
This is substantially more optimistic than the Bank of England, which recently warned that capital values on commercial property could fall by 27% over five years under a “disruptive” Brexit and by 48% under a “disorderly” departure.
Capital Economics notes that the central bank’s analysis was “based on worst-case assumptions designed to stress test the banking system”, rather than providing “plausible forecasts”.