Brexit negotiations could dent UK property market but open investment opportunities

Uncertainty during Brexit negotiations could cause limited, short term falls in capital property values in the UK but this could open up opportunities for real estate investors, a new analysis suggests.

Any declines should remain restrained given expectations of a relatively subdued, but by no means dismal, economic outlook, according to the latest UK property market outlook report from property investors M&G Real Estate.

It explains that while the early post-referendum landscape has been characterised by an element of panic, and the property market has by no means been the exception, investment opportunities will be found in property markets where pricing has recently been overstretched such as in central London.

Meanwhile, other more defensive sectors, such as private rented residential and long lease property, will continue to offer attractive income streams for pension funds and other institutional investors.

The outlook states that the UK property market is now in a much stronger position to withstand any short term economic or political uncertainty than it was during the global financial crisis eight years ago.

M&G Real Estate believes that occupier markets also offers comfort as a lack of supply characterises many locations, with the UK having experienced seven consecutive years of construction running below its historic average level, lending support to rents in the short term particularly in more prime locations.

It also points to anecdotal evidence which suggests that a number of overseas institutions are already looking to take advantage of the recent depreciation of sterling. Indeed, Brexit appears to largely be a domestic concern, with overseas investors continuing to target the UK and viewing London as a global safe haven.

The outlook predicts that the market will see a short, sharp, but not catastrophic, adjustment in pricing as investors build an uncertainty premium into the property market.

Overall, M&G Real Estate anticipates that the cumulative post-referendum decline in average capital values may amount to little more than 10% and, helped by income, the market is expected to see a resumption in positive returns as soon as 2017.

‘We expect uncertainty during the Brexit negotiations to cause limited falls in capital values in the short term and commercial property remains a compelling asset class on a long term basis,’ said Richard Gwilliam, head of property research at M&G Real Estate.

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