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Brexit set to have positive and negative effects for UK commercial property markets
Confidence in the UK’s commercial real estate markets will unquestionably fall due to the Brexit uncertainty with a ripple effect set to spread beyond London, according to a new analysis. It is likely that decisions will be pushed back in the period of heightened economic and political uncertainty that no one can define or quantify and it will most likely take several years for people to fully understand the implications of the decision to leave the European Union, says the report from Fidelity International. But there are likely to be positive as well as negative effects due to the referendum decision. ‘The question is whether resultant pricing volatility is a fair reflection of inherent risks or a potential mispricing opportunity,’ said Adrian Benedict, the firm’s real estate director. He pointed out that before the referendum, transaction volumes were already down 50% in the year to date compared with the same period in 2015. ‘We anticipate volumes to remain modest for the rest of 2016 as investors assess the implications,’ he added. ‘As we saw in the aftermath of the 2008 financial crisis, we can expect real estate investors to seek refuge in the relative safe harbour markets like London West End or long leased assets. However, unlike then, values are already 10% to 20% above long term levels,’ Benedict explained. He believes that many investors will be turning their attention to the occupier market, in particular evaluating the impact on financial and business services companies; anyone with those type of tenants are going to be more circumspect but the impact won't just be confined to London. ‘We can expect to see a ripple effect across the country. Bournemouth for example has a high proportion of people employed by financial service companies and it would be naïve of us to think the impact will be contained to the capital,’ Benedict said. ‘So long as occupiers remain cash generative, we’re unlikely to face a material pricing correction arising from weak fundamentals. Supply of new space remains very constrained and vacancy rates in the key cities across the UK have largely recovered,’ he added. He also pointed out that having short leased assets doesn’t necessarily mean occupiers will move out. ‘Fidelity’s experience suggests less than 25% of occupiers chose to exercise their option to terminate leases or move at expiry. Rather than selling or buying real estate ‘markets’ a greater emphasis will need to be placed on underwriting the occupiers and the certainty of their cash flows,’ he said. ‘As with most clouds, there is a silver lining. Over the last 12 months international buyers accounted for 40 percent of commercial property deals in the UK, a near doubling within 10 years. The relative attractiveness of the UK market is explained by a strong economy but also a relatively weak currency. In US$ terms, the UK real estate market is now back to pre-2004 pricing levels. The question is whether international investors will view this as… Continue reading
Analysis suggests Brexit will have a varied impact on London property markets
The decision by the UK to leave the European Union is set to have a hugely varied impact across London's property markets with some likely to be worse off than others. According to a new analysis from independent property buying agency Black Bric, the sub-£2 million price bracket will continue to attract investors due to its favourable yields, good liquidity, and domestic demand. But the firm’s managing director Camilla Dell predicts that the same can't be said for the prime property market in London and the new build outer prime markets. ‘We expect the section of the market dominated by domestic buyers and those working in the financial services sector, predominantly £2million to £5 million but also up to the £12million to £15 million range, to potentially face some pressure linked to Brexit concerns,’ said Dell. ‘We do not expect the wholesale flight of financial services firms away from London, but it is likely that they will lose their passporting rights, or their ability to sell financial services across the EU if the UK does leave, triggering the departure of some financial services capacity to Dublin or the continent,’ she explained. ‘However, even relatively low numbers of bankers leaving areas such as South Kensington or Notting Hill where Europeans, in particular, tend to be concentrated could have a significant effect on local markets over the next couple of years,’ she added. Black Brick also expects the new-build outer prime market to suffer most from continuing uncertainty, having already experienced a lull period before the referendum vote. ‘The stock market has already heavily bid down builders linked to this part of the market, which is suffering from significant oversupply and the disappearance of the foreign investors who had supported it in recent years,’ said Dell. ‘Areas such as Nine Elms in Vauxhall and Earls Court in West London are particularly vulnerable due to oversupply of expensive properties aimed at the overseas investor. However, there are a handful of stand out developments, such as Television Centre, that we believe are likely to continue to prove popular, and there will certainly be bargains to be had, particularly on the secondary market,’ she pointed out. On the other hand, Black Brick expects the super prime market to be the least negatively affected, with the collapse of the sterling meaning that dollar buyers are actually factoring in a 12.5% increase in their purchasing power since before the referendum. ‘For the global elite buying properties at £15 million to £20 million or above, purchases tend to be about lifestyle choices, rather than business decisions, or are to diversify extremely large portfolios. Indeed, we are still seeing transactions continue. Brexit did not feature in conversations with clients in this part of the market before the referendum, and it is unlikely to be much of a factor now it is underway,’ Dell added. Meanwhile, London’s new Deputy Mayor for Housing James Murray has said there will be meeting with major developers and the… Continue reading
Pending home sales fall across all regions of the United States
After steadily increasing for three months, pending home sales in the United States let up in May with the first year on year fall for almost two years with all four major regions seeing a decline. The Pending Home Sales Index, a forward looking indicator based on contract signings from the National Association of Realtors fell by 3.7% to 110.8 in May from a downwardly revised 115 in April and is now 0.2% lower than May 2015. But even with last month’s decline, the index reading is still the third highest in the past year, but declined year on year for the first time since August 2014. According to Lawrence Yun, NAR chief economist, pending sales slumped in May across most of the country. ‘With demand holding firm this spring and homes selling even faster than a year ago, the notable increase in closings in recent months took a dent out of what was available for sale in May and ultimately dragged down contract activity,’ he said. ‘Realtors are acknowledging with increasing frequency lately that buyers continue to be frustrated by the tense competition and lack of affordable homes for sale in their market,’ he added. Despite mortgage rates hovering around three year lows for most of the year, Yun explained that scant supply and swiftly rising home prices which surpassed their all-time high last month are creating an availability and affordability crunch that’s preventing what should be a more robust pace of sales. ‘Total housing inventory at the end of each month has remarkably decreased year on year now for an entire year. There are simply not enough homes coming onto the market to catch up with demand and to keep prices more in line with inflation and wage growth,’ Yun pointed out. Looking ahead to the second half of the year, Yun believes that the fallout from the UK’s decision to leave the European Union breeds both immediate opportunity as well as potential headwinds for the US housing market. ‘In the short term, volatility in the financial markets could very likely lead to even lower mortgage rates and increased demand from foreign buyers looking for a safer place to invest their cash,’ he said. ‘On the other hand, any prolonged market angst and further economic uncertainty overseas could negatively impact our economy and end up tempering the overall appetite for home buying,’ he added. In spite of last month’s step back in contract signings, existing home sales this year are still expected to be around 5.44 million, a 3.7% boost from 2015. After accelerating to 6.8% a year ago, national median existing home price growth is forecast to slightly moderate to between 4% and 5%. A regional breakdown of the figures shows that the PHSI in the Northeast dropped 5.3% to 93 in May, and is now unchanged from a year ago. In the Midwest the index slipped 4.2% to 108 in May, and is now 1.8% below May 2015. Pending home sales in… Continue reading
