UK commercial property sentiment suffers in wake of Brexit

A vote to exit Europe was always going to impact heavily on the UK commercial property sector

Since June's vote it has really underlined that view, writes Linesight Director, Michael Riordan.

The shockwaves from the UK’s decision to exit the European Union continue to reverberate through the construction and property sectors, even with the knowledge we’re probably three years away from actually leaving the EU.

Like most business sectors, the property market was very surprised by the referendum outcome. While there was plenty of discussion about Brexit’s impact in the weeks after the vote the first concrete indications of market sentiment came with the publication of the RICS UK Commercial Market Survey for Q2 2016. 

The survey showed that market sentiment has deteriorated following the Brexit vote.

“Investment demand fell sharply across the UK, with London seeing the most pronounced decline,” it said.

Of note is that fact that nationally professionals in the commercial sector now feel that the market is in an early downturn phase (54% of respondents take this view in London) with 12-month capital value and rental projections moving into negative territory.

In the capital, rental projections are weaker with 24% more respondents expecting rents to decline over the coming quarter. On the same basis, a net balance of 38% more London surveyors anticipates a decline in all property prices.

By August property specialists Savills were announcing a 23% drop in UK commercial property transactions for the first half of 2016. It also warned of a global slowdown as market sentiment remains negative.

The mood in the UK commercial property market was pessimistic in the run-up to the June vote. Cushman & Wakefield warned:

“The London markets will remain paused or at least moving in slow motion whilst businesses absorb the impact of the exit vote”.

Latest research from the real estate services company says that although Europe overall is seeing growth in the commercial property sector, the UK is acting as a drag in the post-Brexit shake up.

“European investment activity in commercial real estate totalled €56.8bn in the second quarter of this year, a 9% increase on the first quarter,”....

“Although markets have started to settle in the wake of the UK’s decision to leave the EU, uncertainty still remains. The impact appears to be greatest in the UK, although even here, while some deals in the market at the time of the vote have fallen away the majority continue to progress, especially across Central London compared to the rest of the UK,” it added.

Where next for UK commercial property?

In the half-decade up until Brexit, some of the UK property funds were showing annualised double-digit returns over the last four to five years, attracting many new investors into the sector. Even those who bought three years ago will be showing a profit.

The future, however, is difficult to call. Much like the British government, the best policy is not to rush to judgement. By the start of 2017 the dust will have started to settle on the initial shock and the industry as a whole will be in a better place to make market predictions.

One thing for certain is that volatility will become the new normal for the foreseeable future. We are in an era of unprecedented change where the opportunities are yet to be fully understood.