28 July 2016
Everyone has an opinion about Brexit and over the next four weeks we will be discussing our opinion in a series of blogs; focusing on whether or not Britain’s departure from the EU will provide an advantage or disadvantage for British industry sectors.
In this blog we will focus on the property market – how will Britain’s departure from the EU affect property market investors?
The effect of economic uncertainty
On the face of it, the straightforward fact is that nobody really knows what will happen meaning that the general consensus is currently on what comes next? Is it possible to foresee how certain markets will react to uncertainty?
Focusing first on commercial and then residential property, in this blog we take a look at some of the effects of Brexit-related uncertainty in action. Then we’ll conclude with some long term views on each sector.
Commercial property – Property funds valued down
A good way to gauge post-Brexit sentiment towards commercial property is to look at what’s happened to open-ended funds investing directly in properties in the UK. “Open-ended” is defined here as a type of fund that allows investors to withdraw funds at any time. Many such fund managers have marked down the value of their investments by 5% to 15%, to deter outflows and protect investors who remain in the fund. This means that, following Brexit, anyone selling their holdings would have immediately seen a significant decline in capital. The reason for this? The fear that the properties’ last known values were now too high for post-Brexit UK.
Following Brexit uncertainty, many open-ended UK commercial property funds have moved from monthly to weekly valuations. However, it is possible that this could be a temporary blip and could be an advantage to investors and present future buying opportunities.
In the short term, there are likely to be more sellers than buyers. However, for existing investors this means continued downward pressure on values. This is likely to persist until the nation is provided with more clarity on the the nature of Britain’s trading relationship with Europe and how this will affect key commercial property markets, like London and the South-East.
Liquidity could be a problem
Some UK property funds also paused trading altogether after the referendum result, to prevent a sudden flight of capital from certain types of property. Whilst these restrictions are now mostly lifted, this serves as a reminder of the importance of liquidity. Property can be far less liquid than other types of investment such as bonds or listed shares. Due to it’s physical asset, transactions can be slow so it’s not so easy to get your money out of a property investment if a significant number of other investors are trying to do the same thing.
The long term outlook
So the short-term effect of the Brexit vote on commercial property has been almost entirely negative but what about the picture for five or ten years down the line? It’s hard to predict what will be the positive drivers for commercial property in the future because the long term prospects depend on wider economy and monetary conditions. Nevertheless the main stress indicators are confident (as shown by flows in and out of open-ended funds) and lending seems to be stable for now.
Bestinvest, the online investment service, doesn’t think there will be a prolonged downturn and assures investors that Brexit is “a challenge for the property sector, but this is not a post-Lehman Brothers style moment when the whole financial system faced collapse, and the supply of credit was in doubt.”
But what about the outlook for Residential and buy-to-let?
In the immediate aftermath of the referendum result, shares in house building companies were among the shares suffering the sharpest drops in value.
FTSE 100 heatmap the morning following Brext. Source: hl.co.uk
With falls of between 9 to 12% for Barratt Developments, Berkeley Group, Persimmon and Taylor Wimpey it is clear that, along with banks and financial stocks, investors believe homebuilders’ earnings prospects are among those worst affected by the referendum result.
Redrow, a homebuilder listed on the FTSE 250, issued a trading statement the week after the result saying “it is too early to tell whether Brexit will have any effect on future sales.” The market clearly thinks otherwise as its shares are still trading around 16% lower than they were at the beginning of June.
UK residential property market indicates that there may be problems:
- Connells estate agents has reported that sales agreed in Q2 2016 are 13% lower than 2015 and 5% lower than 2014, which it called “greater than expected”.
- Property services group LSL, the parent company of estate agents Your Move, Reeds Rains and Marsh & Parsons, has warned that this year’s profits will be “significantly lower than previously anticipated”, partly blaming the EU referendum result.
- The Knight Frank house price sentiment index measures what householders think will happen to their property value over the next year. A value of 50 indicates no change in prices; higher or lower means a rise or fall. This index fell to 48.3 in July from 59.7 in June, with households in all regions except the South-East believing the value of their homes dipped in July. This downturn reflects some hesitancy from buyers”
However, if you are invested in areas outside London, and you believe that the most expensive parts of the capital have become detached from the mainstream housing market, you might not consider these indicators anything to be too concerned about.
So what do we think the outlook might be for residential property over the next five to ten years ?
Some believe that there are still plenty of structural reasons to believe in residential property as an asset class. Redrow Homes’ statement to investors emphasized “a long-term underlying demand for new homes following decades of under-supply. This chronic shortage of housing leaves market fundamentals unchanged.”
On the demand side, there might be one question mark and that is over whether rising population will continue to exert the same upward pressure on prices? Many investors in the UK will want to remain with what they know, and many of the factors that have driven the appeal of the property sector for so long are still in place; in particular, the shortage of new homes and strong tenant demand in the cities. With those fundamentals, rising values may not be held back for long.
The next step
At UHY Birmingham, we have years of experience as property accountants and our clients benefit from our high level of knowledge about the property sector. Our multi-disciplinary team provides a wide range of accountancy and support services for property companies and those with property investments. If you would like some information on the most suitable way to protect your current financial position and would like to speak to an accountant that is familiar with the concerns that you may have, please contact. email@example.com.