- Kames’ David Wise says the team has seen little change in tenant behaviour post Brexit vote
- Demand outside London remains healthy and will continue to offer attractive income yields in 2017
- Brexit negotiations will be key to the attractiveness of the property market – properties in the City of London most vulnerable due to their exposure to international businesses
London – The impact of Brexit on the UK’s property sector has been exaggerated, with the outlook for much of the market far more positive than initially feared, according to Kames Capital’s property investment director and co-manager of the Kames Property Income Fund, David Wise.
Wise says whilst demand in central London may have slowed to some degree following the vote to leave the European Union, the outlook for property outside of the capital remains very attractive with plenty of opportunities for investors.
He says he and his team have not seen any material change in tenant behaviour post the referendum, with tenants continuing to take on new leases, renew leases and remove (or not implement) break clauses.
“While it’s still too early to judge the full impact of Brexit on tenant behaviour, we are particularly positive on property outside of London where the balance between tenant supply and demand continues to look healthy for 2017”.
UK real estate investment trust shares fell by an average of 23% on June 24th and a large number of retail property funds halted trading in the weeks following the Brexit vote, as investors rushed to pull their investments.
However, Wise says this reaction was not wholly unexpected. “The retail funds market is known for having more volatile cash flows than its institutional counterparty, and in the aftermath of the vote the sector did not disappoint.”
The enduring impact of Brexit has equated to a fall of around 5% for commercial property valuations, with the widest losses seen in larger properties of over £20m. Liquidity concerns were the main driver of this for bigger rather than smaller properties, with the most desirable assets being small prime and well-let properties with long and secure income streams.
Wise says the falls in value mean property is now attractively priced, particularly relative to bonds which are producing much lower levels of income. Kames Capital’s property team has been looking to exploit this primarily through properties outside of London, with Wise noting he believes this space will continue to offer attractive income yields through 2017.
Nonetheless, the situation remains fluid. Wise says that Brexit negotiations will play a large role in the future attractiveness of the property market, with properties in the City of London most vulnerable because of their exposure to international businesses.
“It is likely that in time certain occupational sectors will be hit harder than others post Brexit,” he believes. “The City of London office market, with its high exposure to international banks and financial institutions, could be particularly vulnerable given MiFiD ‘passporting’ rules are at risk, as this may cause the major banks and finance houses to relocate parts of their operations back into the EU.”
“However, the whole real estate sector also faces political risks caused by the Brexit negotiations, which will impact via UK GDP growth. But this is obviously not unique to property, and therefore our general outlook for the sector is positive for next year.”