June 24, 2016
UK Referendum Real Estate Implications
The U.K. referendum has delivered a narrow voting majority to leave the EU. The U.K. government is now likely to undertake a transitional negotiation over what relationship it should have with the EU, targeting one that has fewer social regulations. It will also seek to continue a free trading arrangement, such as that adopted by Norway and Switzerland. In the meantime the current rules remain.
Over the medium term we see Sterling and the markets recovering, as it is in the interest of politicians in the UK and Continental Europe to find a pragmatic solution. UK GDP will probably slow (forecasts suggest from 2% to 1.5% for 2016) this may be offset by more loosening of monetary policy in the UK and Eurozone. There will be occupational uncertainty particularly in central London offices as international businesses seek to understand the implications for them, but it’s hard at this stage to determine this without seeing the political model being adopted. Regional cities may prove to be more resilient, as we suspect the industrial sector to be.
Palmer Capital’s view for clients is that we expect falls in Sterling and UK equity markets over the coming days, and over the summer UK and European risk assets will see a fall in values. Conversely the value of long term income streams, including bonds and some real estate assets, will hold up as people seeker safer havens . Central London residential is likely to be hit by uncertainty in the City of London with international investors balancing the market movement against exchange rate advantages. However domestic residential assets are likely to be less affected as there is sustained national demand driven by demographics (1% growth in the last 12 months) and a short term (1-5 year) supply deficit.
We will continue to advise clients to buy long term core income (and especially in the short term when uncertainty most affects pricing) and to focus on urban residential and commercial assets with good infrastructure links that are driven by population rather than solely economic factors. For international buyers, as UK assets in portfolios will be valued lower in their local currency we would not advise selling, indeed buying new assets will be more attractive if they are held over the long term.
Finally, we hope the vote will be a catalyst for more free market thinking across Europe and less regulation in the UK.