29th June 2016
The hit to UK real estate sentiment sparked by the UK’s vote to leave the EU may be limited by easier monetary policy, says Chris Urwin, head of global research at Aviva Investors.
A majority of UK voters, 52 per cent, voted to leave the EU on 23 June with profound consequences for the UK real estate market.
While uncertainty caused by the poll has had little effect on domestic real estate pricing this year, investment activity has slowed. This hasn’t been exclusively caused by referendum fears; it largely reflects greater investor caution as the market reaches the top of the cycle.
Nevertheless, the vote to leave suggests there is now little hope of any bounce in sentiment. Indeed, it may be many years until we have clarity on the UK’s constitutional arrangements and trading agreements.
The financial markets’ reaction to the vote to leave the EU has been swift and dramatic. For instance, sterling fell to its lowest against the US dollar in over 30 years and 10-year gilt yields reached a record low. And, as equities plunged, real estate shares were particularly badly hit.
The sell-off is being driven by:
What happens next?
Negotiations for exit do not start immediately. For that to happen, the UK needs to inform the European Council of its intention to invoke Article 50 of the Treaty of the European Union.
However, the government may choose to start negotiations before triggering Article 50: once invoked, negotiations are limited to two years unless there is unanimous agreement of the European Council to extend them.
So there is going to be a prolonged period of time during which the terms of our withdrawal from the bloc are unknown. It could take even longer for clarity on the UK’s terms of our trade with trading partners around the world.
Furthermore, calls for a second referendum on an independent Scotland will grow. Implications for the rest of EU are unclear, but a weaker UK economy would be another headwind for an already fragile economy, while the success of the leave campaign may encourage nationalistic tendencies across the continent. Risk aversion has descended on government bond markets with ten year German bund yields falling into negative territory in the wake of the vote, while ‘peripheral’ European bond yields jumped.
Implications for UK real estate
Domestic capital values now look likely to decline moderately over the remainder of the year. It is worth noting, however, that some commentators believe Brexit will hit real estate returns, and the economy, more severely. By contrast, we had expected to see a slight increase in capital values over coming months had the UK voted for the status quo.
We expect to see:
Clearly, the referendum result will weaken UK real estate prospects, both in the short and medium term. However, the deterioration may be limited somewhat by easier monetary policy. And, if interest rates remain even lower for even longer, high-quality real estate assets may benefit from their safe haven status. Remember that in times of heightened uncertainty such as this, attractive investment opportunities will arise.