Uncertainty represents a clear risk to the UK real estate market and as a result, any clarity about the UK Government’s plan for EU negotiations are welcome. However, we see a number of obstacles to the plans laid out in the Prime Minister’s recent speech and therefore, anticipate that the period of negotiation will be characterised by a high level of volatility across markets.
Our outlook for the UK real estate market has not changed. Against a backdrop of low growth and low gilt rates we believe that property yield will remain attractive to investors seeking income. Furthermore, the exodus of international capital that was feared prior to the referendum has not materialised and it is likely that a weakened Sterling will continue to provide an entry point for a number of overseas buyers.
Significant polarisation across the market is expected. Core assets with secure income streams will be resilient but there will be scope for assets with a high risk of void to experience price softening. London City offices remains the sector that is arguably the most vulnerable in the short term to the hard Brexit outlined in Theresa May’s speech and we anticipate the loss of some City jobs in the short term. However, we believe that longer term the City will continue to be able to attract a wide range of businesses. Potential new barriers to trade under this scenario mean that there are also risks to our manufacturing sector and therefore, industrial real estate. Given Theresa May’s reiteration of a commitment to a two year negotiation period, albeit with the hope for a further period of transition, we expect to see begin to see more corporates taking decisions over the next six to nine months, which will give us a clearer indication of the potential impact of the decision to leave to EU.