Commercial property developers and investment funds in the UK are taking a serious hit after the vote for Brexit in the country's referendum on its membership of the European Union (EU), but industry experts are playing down fears of another crash similar to the financial crisis of 2008/2009.
Some of the largest developers of commercial projects in the UK, including Land Securities and Berkley Group, have seen their share prices slide sharply since the 23 June referendum, in which Britain voted to leave the EU by 52% to 48%, triggering a lingering political crisis. CBRE, a US-listed commercial property consultancy with exposure to the UK market, has also seen its shares dip.
Standard Life, Aviva and M&G have suspended redemptions in their multi-billion pound commercial property investment funds over concerns about liquidity, fearing a run by investors pulling money out over Brexit. Suspending redemptions prevents funds from having to suddenly rush sales of property assets to raise capital. Other fund managers have written down the value of their commercial property portfolios by hundreds of millions of pounds, including Aberdeen Asset Management and Legal & General.
"This deterioration in sentiment could reflect the fact that the prevailing consensus was that an 'out' vote would hit property markets hard," said Eduardo Gorab, a property economist at Capital Economics. "After all, not only does the London office market look vulnerable to a drop in demand, but pricing in the UK is already looking stretched."
Before the referendum, two credit rating agencies warned about the effect of Brexit on commercial property in the UK. Standard & Poor's warned in a report that a vote for Brexit "could potentially reverse the significant boost to real estate asset values in the UK", and the office sector would likely be the worst hit.
Fitch Ratings also predicted there was potential for lower foreign investment in the post-Brexit future and an exodus of firms from the City of London to EU-member countries, weakening demand for office space and hitting rents and capital values. An economic downturn could also clip demand for commercial property. Some economists are now predicting a recession as uncertainty over Britain's future relationship with the European single market sees investment in the UK slow markedly.
But Mat Oakley, director of commercial research at Savills, an estate agent, said "the fallout will be less extreme than we saw in the global financial crisis or in a more typical recessionary cycle". He said there had already been outflows from commercial property funds for several months as investment yields fell and the market slowed ahead of the referendum. According to the Investment Association, in May 2016 alone there was a net £360m ($470m, €422.6m) in outflows from property funds.
"Regardless of the referendum, the total return an investor could get from UK real estate was coming down from 23-24% a couple of years ago to 7-8% this year," he explained. "Obviously, people will take their money out and put it into somewhere they think will give a higher return. This just intensified the situation."
Oakley stated commercial vacancy rates were low, underpinning rents, and the uncertainty surrounding Brexit means investment on the supply side will stall — further supporting prices. "We were not looking at the next five years being a period of exuberant supply side response to that," he said. "So not much stuff being built. And certainly some of the planned development projects will be delayed or cancelled altogether. So the supply side, regardless of whether tenant demand falls away or not, is not going to lead to that massive fall in rents."
Moreover, few owners of commercial property are in a distressed position where they must sell. The majority are able to hang on until the market recovers rather than selling up and incurring losses. Those most likely to sell are the investment funds who need to quickly offload assets for liquidity to repay investors now drawing money out.
Those are a small section of the overall market, Oakley said, and demand is being supported by "opportunistic buyers" looking for cheap deals, particularly as sterling weakens markedly against other major currencies, such as the US dollar. "The volume of opportunistic investor interest in the UK post the referendum has been surprisingly significant," Oakley said.
The continuation of ultra-low interest rates for longer than expected, with the prospect of a further rate cut by the Bank of England on the horizon to support the economy through the aftermath of the referendum, should also help to support demand. The base rate is currently 0.5%, an all-time low.
"With cuts in bank rate back on the cards, the drop in interest rate expectations has more than compensated for rises in the risk premia, and gilt yields are likely to stay lower for longer," Gorab said. "In a low sovereign yield environment, property is likely to look more attractive than many of the alternatives and boost demand of commercial property — at least once it becomes clear that the fears of a recession are being overplayed."
Gorab concluded: "Clearly, the uncertainty kicked up by the referendum's result has had an adverse impact on sentiment, which has been driving outflows over the last week or two. However, if we are right in thinking that occupier and investment markets are well placed to weather the uncertainty, we suspect that fears of a repeat of 2009 are overdone."