By Andy Noton, Partner
On 23 June the commercial property sector held its breath to see what effect the UK’s referendum vote to leave the European Union would have, and reports quickly followed of buyers exercising “Brexit clauses” to pull out of transactions or re-negotiate prices. A number of well known UK open ended funds were closing their doors to redemptions and by mid July it seemed as if the market going into freefall was a real possibility.
The reality, 3 months on, appears to be somewhat different with prices holding up relatively well (recent reports indicate prices declined 2-5% in Q3 which is significant but not a sign of a market in freefall) amid increasing numbers and volumes of transactions. It appears sterling’s recent fall has attracted significant foreign inward investment from global investors seeking a yield in a country still seen as a global safe haven. Sterling’s recent fall has made the UK look cheap, to overseas investors on historic levels, and this combined with a relatively benign environment for lenders is making geared income returns of 6%-8% still achievable on good quality properties. Gearing levels provided by banks are still relatively low (typically 50 – 60%) but this has resulted in (historically) low interest rates which, following the recent actions of the Bank of England, look set stay low for much longer.
Looking forward a great deal of uncertainty clouds the UK with the Sterling and the FTSE fluctuating wildly on the back of politicians comments and it won’t be until at least the summer 2017 before any direction is received on what the relative negotiating positions of the UK government and EU will be. Looming consumer inflation is also likely to be an issue for retailers who already have wafer thin margins and this could push weaker retailers to the wall causing increasing tenant defaults and vacant units. The US election result adds further uncertainty in an already nervous market. However, the theory is that a Trump (Republican) presidency is likely to be good for the US over the medium term, supported by probable rate rises in the US. As worldwide investors chase any asset that pays a yield, the biggest question asked is “Can this asset continue to pay the yield it does now into the future?”.
To date we have seen no real change in the number of purchases or sales by clients or the number of prospective investors making enquiries on structuring prior to purchase. However, a number of the prospective purchasers are anticipating snapping up bargains as prices fall and ensuring they are in a position to act should opportunities arise.
Personally, I suspect uncertainty will cause a number of investors to sit on their hands reducing volumes of asset coming to market until there is a degree of certainty on the UK’s Brexit negotiations. As we are unlikely to be able to start formally negotiating a trade agreement with the US until we exit the EU, that is unlikely to have any short to medium term effects. The benign financing environment should protect from significant falls in value as the number of forced sales through repossession will be low.
Time will tell...