Brexit: investment markets

While transaction volumes have held up better than many fears since the referendum, bid pools are increasingly more shallower as markets adapt to late-stage cycle

4. Investment markets

Transactional activity in UK commercial real estate has held up better than most predicted prior to the referendum, mirroring the surprise to the upside seen at the macro and occupier levels. Quarterly investment volumes have surpassed £10bn per quarter throughout 2018, according to data from Real Capital Analytics, above the 10-year quarterly average which is used as proxy for market liquidity.

Fourth quarter transaction volumes are expected to show close to £14bn when released, according to preliminary estimates by Cushman & Wakefield, implying around £55bn for the full year 2018.

However, the outlook is again for moderating investment volumes. “There is a feeling that we are coming down off a higher level, there is a feeling that there is now less liquidity and there are fewer bids per transaction. For investors that take a long-term view, there could be exciting opportunities over the next few months for those that are brave and willing to underwrite fundamentals that look beyond the noise of the first three or four months of this year,” said Elisabeth Troni, head of EMEA research and insight at Cushman & Wakefield. “The thing to watch is the depth of pool in bidding activity.”

Under the Article 50 ‘fudge and delay’ scenario, Capital Economics predicts a 3.9% two-year accumulative capital depreciation, virtually identical to the 4% decline assumed if Mrs May’s Brexit plan was enacted. However, the timeline of depreciation is different. Under the delayed scenario, around 3.4% of this accumulative value decline would occur in 2019 instead of a near balanced share under Mrs May’s Brexit plan scenario.

Andrew Burrell, chief property economist at Capital Economics wrote: “This is because uncertainty caused by the delay will bring more of the yield decompression into 2019, despite slightly lower interest rates in this scenario. In addition, rental prospects are more subdued because of weaker growth in the near term. We think this will be reflected in investment trends too.”

Under a worst-case no deal scenario, Capital Economics predicts a 9% cumulative fall in capital values, with much of the pain being felt in 2019.

“The most important point that even the disorderly no deal impact is a correction, not a crash, still stands. In the central scenario, the adjustment remains relatively mild, albeit more of the pain is now felt in the short term,” added Burrell.

IPF’s Consensus Forecast suggests 2019 will be an inflexion year for UK commercial property markets, with all-property total return shrinking by more than half to 3.0%, depressed by UK all-property capital depreciation of -1.7%. While there are concerns around Brexit in the near-term, this forecast correction is shallow and expected to be relatively brief with investors refocusing on fundamentals to help look beyond the noise and support strategies.

“Most investors are focused on the stress in retail, offices to a lesser extent and still feel very optimistic about the industrial sector,” explained Troni.