Aviva: Brexit will weaken UK real estate sentiment
UK’s vote to leave the EU will weaken domestic real estate sentiment but impact may be limited by easier monetary policy, according to Chris Urwin, head of Global Research at Aviva Investors.
While uncertainty caused by the poll has had little effect on domestic real estate pricing this year, investment activity has slowed. But this hasn’t been exclusively caused by referendum fears; it largely reflects greater investor caution as the market reaches the top of the cycle, Urwin said.
In the wake of Brexit, there’s “little hope of any bounce in sentiment” for UK real estate and prospects are expected to be hit both in the short and medium term, Urwin said.
According to Aviva, prolonged illiquidity in real estate markets pending renegotiation of international agreements is expected and domestic capital values now look likely to decline moderately over the remainder of the year.
“It is worth noting, however, that some commentators believe Brexit will hit real estate returns, and the economy, more severely,” Urwin said.
Central London offices — specifically in the City — are particularly exposed to leave risk, as some activities currently undertaken in central London, such as euro-denominated wholesale banking, are under threat.
Still, London remains a leading global centre for a broad range of activities, many of which would be relatively unaffected, Urwin said.
“[London] continues to benefit from a low corporate tax rate, a diverse talent pool and relatively low regulation,” he said.
Aviva expects UK occupier markets to be affected significantly less than investment markets as, in the short term, a rapid deterioration in the labour market is not expected and demand for space is not set to fall rapidly.
Also, deterioration may be limited somewhat by easier monetary policy.
“If interest rates remain even lower for even longer, high-quality real estate assets may benefit from their safe haven status. Remember that in times of heightened uncertainty such as this, attractive investment opportunities will arise,” he said.
On the other hand, sterling depreciation is expected to support demand from overseas investors.