BREXIT: THE ONLY CERTAINTY IS UNCERTAINTY

Published 29 June 2016

The financial markets were very quick to react to the result of the EU referendum last week, with tumbling share prices and a plummeting pound suggesting that traders viewed the people’s decision as one which will have an overwhelmingly negative impact on the economy, writes Guy Gowing.

Commercial property is perhaps one of the best indicators of the health of the wider economy, so what will the Brexit decision mean for the commercial property market in the coming weeks, months and years.

The first thing to say is that we are likely to see some considerable volatility in the very short-term, as investors, businesses and consumers seek to make sense of a result that – if we are to take the markets as an indication – came as a shock to many.

That instability is certain to impact on the commercial property market over the coming months. Uncertainty and turbulence are the enemies of long-term investment, and we are entering the biggest period of uncertainty for many years. 

That said, the bond and equities markets have themselves been experiencing volatility over the past few months (and not just because of the looming referendum), and this has ironically reinforced the case for investment in property, which continues to provide long-term income stability, as well as being able to add value through active asset management.

The UK has a very sophisticated property market, attracting global occupiers and investors.  Will this continue to be the case after Brexit?  Much will depend on the type of trade deal which we are able to negotiate with the remaining 27 EU members.  We won’t know that for at least two years, so stand by for a period of uncertainty and potential stagnation.

That said, commercial property continues to be seen as a stable safe haven asset.  Its attractiveness as an investment opportunity is supported by the stability of one of the world’s most secure democracies – ironically the process of the referendum, and the acceptance among all politicians of the result, demonstrate this very well. 

In the long-term, the Leave vote is unlikely to change this (although what happens in Scotland will certainly test it).  However, in the short-term it is inevitable that the vote will create a sense of uncertainty across the business community which will impact on the commercial property market, and could lead to short-term wobbles both in capital values and rental yields.

In the longer-term, it will be factors such as a future trade deal and how free movement provisions are affected which could lead to businesses potentially delaying relocation or expansion plans – many are likely to wait and see what emerges in the ‘divorce’ negotiations.  Likewise, it is possible that, given that the UK is often used as a platform to access EU markets, that businesses may choose to locate into countries remaining in the EU rather than Great Britain.

Whatever happens in the long-term, the only certainty at the moment is more short-term uncertainty.  Our politicians need to realise this and work very hard to provide clarity about the future.

 

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