How has the Brexit vote affected property investment?

While there are certainly risks within areas of the market, and indeed some falls in value within particular areas, these headlines have somewhat concealed the reality that the market is currently far healthier than many might expect. So what has been going on?

The tenant market 

It is obviously relatively early days to be able to judge the impact of Brexit on tenant behaviour.

However, it is very encouraging to note that to date we have not seen any material change in the behaviour of tenants who have continued taking on new leases, renewing them and removing or not implementing break clauses.

This is not to say that tenants will not modify their behaviour in future, but to date it seems to be business as usual for the occupational market.

The impact on funds

Clearly there has been an impact on some retail funds that have suspended dealings and/or applied fair value pricing adjustments to reduce the valuation levels of their funds since the Brexit decision.

The retail funds market is known for having more volatile cash flows than its institutional counterpart, and in the weeks following the vote the sector did not disappoint.

However, while the retail funds market is significant, it is only a small part of the wider property investment market also populated by pension funds, property companies, high net worth investors, SIPP investors and the like.

Outside of the retail market, Brexit has had much less of an impact, as the more experienced and savvy investors have avoided any panic and sought to ride out the storm.

Prime v secondary

Conventional wisdom would have us believe prime property is more liquid than secondary and a safe haven in periods of volatility.

However, it has actually been larger properties of more than £10m that have been less liquid, and where falls in value have thus been greatest.

Surprisingly to some, many smaller properties have proved more liquid, even where they have been more secondary in nature. That being said, the most desirable assets in today’s market have been small prime and well-let properties with long and secure income streams.

Overall, across the market we have seen a fall in prices of around 5 per cent. Naturally, this masks some assets where values have remained static or even improved, and others where falls in value have been significantly greater, but as a whole it appears the dust may be starting to settle.

That is not to say the property market will not see any further impact in future, particularly as we go through Brexit negotiations, but for the moment it is starting to return to normal. Investors are beginning to return amid attractive income yields which, in relation to bond yields, are even lower than before.

Who is most at risk?

Thinking about property from a top-down perspective it is likely that in time certain occupational sectors will be hit harder than others. The consensus view is that the City of London office market, with its high exposure to international banks and financial institutions, will be particularly vulnerable.

The driver of this is that ‘passporting’ rights are at risk, which may cause the major banks and finance houses to relocate parts of their operations to the EU.

Ultimately, the real and lasting impact on property will depend on what is negotiated with Europe, in particular what trade deals the UK strikes with the rest of the world and the impact these will have on UK GDP.

But for now, and as the retail property market starts to return to normal, the impact of Brexit appears to have been less than one might have expected.

David Wise is investment director for property at Kames Capital