Britain’s commercial property market initially took a turn for the worse after we voted as a nation to leave the European Union. Panic, particularly amongst retail investors, who exhausted some property funds’ cash buffers, forced fund managers to suspend trading as they simply weren’t able to sell their illiquid assets at appropriate prices and in the volumes that were demanded. Figures from the Investment Association show that there were over £1.5bn in outflows from UK property funds just before and immediately after the referendum. On top of this, between May and June the total value of commercial property deals fell by 38% to just under £2bn, making it the lowest reading since April 2011. The latest monthly figures for August show that investment value fell by just over 25% to £1.57bn, meaning that deal activity is now the lowest it has been since the height of the credit crunch in 2009.
However, despite the events that have occurred post-Brexit, the most recent economic indicators have led to increased optimism within the property market. Labour market data for July showed that there were around 174,000 new jobs created meaning the rate of employment remained at 74.5%, a record high. This has translated through to Central London office take-up which in fact increased by 25% between June and July. The IPD monthly index showed, rather encouragingly, that rental values were relatively unchanged between June and July, the annual figure now stands at 3.2% in July having peaked at 4.4% in February. Overall property yields rose by 17bps to 6.25% in July despite a 2.8% decrease in capital values, meaning that total returns were largely driven by income.
To add to the positive data that has emerged post referendum, some of the funds which had suspended withdrawals have now lifted those restrictions. However, to cope with the inevitable outflows many of the managers have had to revalue their funds at 6%-7% lower, meaning that many investors have chosen to remain in their respective funds rather than take a certain hit. While all this has happened, sterling has depreciated and the Bank of England has reduced Bank Rate to 0.25% meaning that property now looks to be a more attractive asset class relative to others, especially to foreign investors who will have increased bargaining power. The general consensus has changed from doom and gloom at the result of the referendum to business as usual. As long as we continue to create jobs, there will be a demand for commercial property and as long the UK economy continues to grow, property prices should continue to increase, albeit at a slightly slower pace than pre referendum. The important thing to remember is that property is a highly illiquid asset and before investing you should establish an investment horizon of at least five years, and probably more.
