Beth Brearley, Features editor, Fund Strategy
The impact of the Brexit vote on UK property was swift and vast, most notably in open-ended property vehicles, a number of which rushed to gate their funds as spooked investors headed to the exit.
Indeed, there was a year-on-year rise in UK retail investors’ activity in the property space of 900 per cent in the period following Brexit, according to online investment platform rplan, with outflows 12 times the size of inflows.
While the commercial property sector felt the pressure of fleeing investors, with UK property values dropping by 2.4 per cent in July (according to the Investment Property Databank), there was still activity in the sector; property giant British Land announced a raft of lettings and sales deals in the month following Brexit.
Since mid-July investor outflows from property funds have dropped and commercial property values avoided going into freefall. So what is the outlook for the sector now?
The UK is currently forecast to avoid recession in the fallout from Brexit, but the poor outlook for economic growth may dampen the prospects for property, with businesses potentially delaying investment decisions causing the occupational market and rental demand to suffer.
Although property prices could feel the weight of forced sellers, on the flip side the poor performance of sterling could encourage overseas buyers, while from a portfolio perspective commercial property holds its value in largely yielding more than bonds.
Peter Lowman, Chief investment officer, Investment Quorum
Britain’s decision to leave the EU had an immediate effect on the UK property market.
In residential property we saw values come under pressure, particularly in London, while in comm-ercial property many of the authorised unit trusts announced closures on liquidity issues. The lower economic expectations could continue to weigh heavily on this asset class.
In respect to UK residential property, activity continues to weaken, however, the medium-term outlook seems to have stabilised. While new buyer enquiries are apparently falling, it would appear that the letting market remains fairly buoyant, even if rent expectations have moderated a touch.
There still seems to be an acute shortage of UK residential property, which should provide some underpinning for prices, and subsequently act as a support for investment returns. The total return outlook has softened slightly over the short term for both commercial and residential property but the overall fundamentals remain intact and therefore should support the longer-term outlook.
Tim Cockerill, Investment director, Rowan Dartington
Calm has now returned to the property market because the feared negative impacts of Brexit have failed to materialise. While the commercial and residential property markets have slowed down, there have not been any major price drops.
There are however likely to be forced sellers out there and this may in time push prices lower.
But in cities like London the drop in sterling will buoy overseas buyers, a valuable counter balance that could cushion the impact on vulnerable trophy assets.
It seems our exit from the EU will be a long and drawn- out affair which, counter to popular opinion, may be good for the economy – allowing adjustments to take place and reducing the likelihood of sudden hits to trade.
Overall occupancy of commercial property should, as a result, be robust, resulting in steady rental income and valuations remaining solid. No doubt there will be some change but nothing dramatic.
Consequently the outlook looks set fair, yields are attractive, and long-term modest capital growth should come through.
Mike Deverell, Investment manager, Equilibrium Asset Mgmt
Commercial property has been hardest hit by the referendum. Funds have written down the value of many of their properties substantially and several have closed the door on redemptions as cash levels run perilously low.
In many ways, this rush out of the sector is perfectly rational. The first thing we did after the referendum was to sell any remaining property, knowing others would soon do the same.
With many economists predicting a downturn in the UK, property becomes less attractive. However, the real evidence from those “on the ground” is mixed.
According to valuers and agents, deals collapsing and real falls in prices have only really occurred in London, especially the City. This makes sense as uncertainty over passporting may make firms decide to station staff elsewhere in Europe.
Outside the capital, however, it appears to be business as usual for now. Therefore, given the extent of the writedowns and the high rental yields relative to bond and interest rates, funds with little or no London exposure look potentially attractive.
James Calder, head of research, City Asset Management
From a retail investor’s perspective, UK commercial property has been the most negatively affected asset class due to the referendum result. This degree of panic was not replicated within the much larger institutional direct property market. The liquidity squeeze within the retail market has therefore been created in anticipation that the outlook for the UK commercial property market has collapsed.
I do not believe the sector will suffer anywhere near the falls witnessed during the great financial crisis. Current leverage within commercial property is very subdued, financial institutions are continuing to lend and speculative development has been virtually non-existent.
Anecdotally, those funds that found themselves in a liquidity pickle have managed to transact quickly, although at discounts reflecting their distressed state, which should not be confused with the market
as a whole.
I have concerns over London City office space, but managers that have avoided this area and pursued a smaller lot size approach will likely weather this storm better than their peers.
John Husselbee, Head of multi-asset, Liontrust Asset Management
Property’s appeal as an asset class in recent years primarily derives from its ability to offer a reasonable yield in a low interest rate environment. Investors in retail funds have, however, suffered a painful time this year due to substantial outflows from these funds – reflecting nervousness over the asset class’ outlook – which have led providers to impose fair value pricing policies and temporary fund closures.
To say Brexit was the sole cause of these woes is wrong, although it accelerated fund redemptions which have been negative since early 2016.
Retail property funds last suffered a liquidity crisis of this scale eight years ago. We do not think economic conditions are as bad as they were back then in the midst of the global financial crisis, but the current outlook still remains very unclear.
We would, however, remind investors they should be investing based on long-term fundamentals rather than short-term expectations, an investment maxim which is particularly relevant to property due to the illiquidity of the underlying assets.
John Redwood,Chief global strategist, Charles Stanley
The Brexit vote spooked various valuers who decided commercial property values, especially in the centre of London, would be badly hit. Presumably they expected less tenancy demand and less foreign interest in buying, owning and renting in London.
Today it looks as if the shock to the London commercial property market was exaggerated by some valuers. New foreign buyers emerged as to them London property had fallen in price thanks to the fall in sterling and now look decent value. Domestic purchasers also emerged, with good prices being achieved for some central London properties. There was no immediate rush to the exit from London as some feared.
While it is important to watch future levels of tenant demand for space and investment demand for property investments to see if there is a change from the past bullish patterns, it looks as if there are still attractions to property investment. With commercial property on the whole yielding more than bonds and more than most shares it can be a good longer-term investment for a portion of larger portfolios.
Alex Moore, analyst, Rathbones
Earlier this year, we exited a number
of our CRE open-ended property funds as part of an asset allocation call on
The majority of returns come from rental income and there is still an investment case for income from this sector, but from a NAV perspective, we are adopting a wait-and-see approach.
Many investors were lured into this asset class by punchy capital gains that appeared uncorrelated to equities, but became increasingly so. Following the selling of assets by several suspended open-ended funds in recent months, there is now potential for further asset reappraisals.
Historically, August tends to be a quiet month for CRE trusts. The Q2 figures were largely positive, but they had not fully accounted for any impact from Brexit.
At this juncture, while most vanilla trusts have moved to a discount, specialist vehicles have held up. Overseas interest still abounds, providing support to the sector as a whole, but we think it will take another six to 12 months before there is any real equilibrium from a valuation perspective.
With regards to trusts in particular, the Q3 and Q4 results will certainly illicit more of an insight into the underlying state of the CRE market.