UK property markets in good position to weather Brexit, says two new reports
Regional property markets around the UK currently offer potentially better investment opportunities than those in London, with Brexit likely to hit the capital harder than anywhere else in the UK, a new report suggests.
While commercial real estate investment returns in London are unlikely to plummet during the Brexit negotiations, which are due to get underway officially in March, the market could be affected in the short term, according to an analysis from Kames Capital.
Brexit does pose a risk to the city’s outlook in the short to medium term so for the next 12 months at least better property returns will be found elsewhere in the country, according to David Wise, investment director of Kame’s property team.
‘At present, regional markets are showing no signs of slowing. Tenants are signing new leases and paying modestly higher rents, and even if this were to change, we are better insulated than competitors as we don’t need to be seeing rental growth to deliver attractive returns,’ he said.
Wise pointed out regional markets are much less exposed to Brexit, and historically less volatile, offering a more attractive return profile than London in current market conditions.
‘London is the big risk when it comes to Brexit, although it was already a long way through its rental cycle and was probably due a slowdown anyway. The depreciation of Sterling has and will underpin the London market so returns will not fall off a cliff, but it will likely be a market that it is better to be out of for the next year to 18 months,’ he added.
The Kames Property Income Fund currently has just 5.6% in London. Instead, the fund is exposed to the regions of the UK and in particular the larger regional cities including Manchester, Bristol, Leeds, Sheffield and Newcastle.
Meanwhile, a separate report from M&G Real Estate, one of the biggest property investors in the UK, says that the market is well positioned to weather any Brexit uncertainty. It explains that investors are attracted by the current depreciation in Sterling and the economy is expected to be resilient.
The report predicts market turbulence will continue to gradually subside as occupier demand remains resilient, capital values rise and the UK market remains particularly attractive to overseas investors as a result of weaker sterling.
The industrial sector will remain upbeat as it continues to benefit from e-commerce driven structural change, maintaining the demand and supply imbalance and creating strong rental growth in the short term. This unwavering demand will present opportunities for investors and developers looking to meet demand, particularly around the established hubs in the south east and around the M25.
However, it is expected there will be a slight weakening of the central London real estate market. Changes to stamp duty introduced at the start of last year are influencing the central London residential while central London office take up is likely to be affected by businesses more likely to be impacted by Brexit.
However, with GDP moderately positive at 0.5%, general growth should underpin the demand for space, the report says and it also points to a ‘keep calm and carry on’ mantra in the investor market.
It adds that stability has returned to capital values which are showing moderate growth and property yields continue to offer a significant premium above Government bonds while more defensive sectors, such as private rented residential and long lease property such as supermarkets, will continue to hold up, offering attractive income streams for pension funds and other institutional investors.
‘The UK property market appears to be in a much better position than we were expecting in the summer. We now look to be entering 2017 from a position of relative strength and with a modicum of optimism. However, it is clear that there are definite and significant headwinds in place that may affect the market over the next two years,’ said Richard Gwilliam, head of property research at M&G Real Estate.