Property equities: ‘Brexit’ implications in the UK and Europe

04/05/2016

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Guy Barnard, Manager of the Henderson Pan European Property Equities Strategy and Co-Head of Global Property Equities, responds to questions on the upcoming UK referendum to leave or remain within the EU. Uncertainty in the run up to the referendum is impacting investor demand for UK property but the income characteristics of the sector should remain attractive regardless of the outcome.

Q: How is uncertainty in the run up to the EU referendum currently affecting property markets?

In the direct property market we have seen a substantial slowdown in the pace of investment activity. According to commercial property agent Lambert Smith Hampton, total UK commercial property volumes fell by 27% to £11.7bn in the first quarter of 2016. Central London offices, where the risk of the UK leaving the EU (‘Brexit)’ is considered the greatest, saw transaction volumes fall to £2.2bn compared to £4.6bn a year earlier. It is however difficult to disaggregate the impact of ‘Brexit’ from wider capital market uncertainty in Q1, and in a market that was already expected to slow from the very strong volumes in recent years. But clearly investment decisions are being delayed and we expect this hiatus to continue in the run up to the poll.

Conversely in the occupier market, property specialist CBRE reported that year-to-date office take up in central London had been 3.1mn sq ft versus a ten-year average of 3.2mn sq ft, and that a further 3mn sq ft is under offer into Q2 2016. While this data is backward-looking, it does suggest that business decisions are still being made despite the uncertainty.

Within the listed property market, since the start of the year UK property stocks have underperformed both wider UK equities and global property peers. London-focused stocks have lagged within the UK. As a result, many companies are trading at multiples not seen since the financial crisis as investors have reduced exposure.

Q: What key risks would a ‘leave’ vote imply for European property equities?

The key risk we see is a further undermining of investor confidence and consequently delays in business and investment decisions. Short term, we would expect investment markets to remain weak and prices are likely to decline as risk premiums rise. The longer-term economic impact of ‘Brexit’ is harder to forecast, but UK occupier markets would suffer in the short term from a reduction in foreign business investment.

Stock markets are forward looking and we believe a high-level of ‘Brexit’ risk has already been priced-in. We would, however, expect more volatility in the case of a vote to leave.

The knock-on effect on the rest of Europe is also likely to be significant, particularly with key elections in the year ahead; political risk will be a key factor for investors.

Q: Which areas of the property market would be impacted the most?

The London office market is likely to be most exposed to short-term uncertainty caused by ‘Brexit’. Demand from financial and multinational occupiers will weaken as they decide how this will affect their businesses going forward. We would therefore expect to see rents soften.

Q: How have you repositioned your portfolios in anticipation of a ‘Brexit’?

We have significantly reduced exposure to the UK over the last year. However, this was less to do with ‘Brexit’ risk. It was more a reflection of higher valuations and our expectations of slower growth from UK commercial property this year and in coming years following several years of very strong performance.

Within the UK property market we have increasingly focused on structural growth, rather than cyclical areas. This includes self-storage, student accommodation and residential land outside London.

Although their investment decisions stacked up in isolation, we made two portfolio additions taking into account ‘Brexit’ uncertainty: Green REIT (Dublin offices) and Hansteen (UK and continental industrials and a beneficiary of weaker sterling).

Q: Do you see any opportunities should the UK exit the EU?

We would expect further monetary easing by the Bank of England. This will reinforce the case for income-producing sectors such as property, as long as income streams are robust (i.e. long-dated rental contracts). A weaker sterling could also attract additional international capital to UK property, as it did post the global financial crisis.

On the flipside, there may be greater incremental demand in other parts of Europe, e.g. office space in Frankfurt, Paris or Dublin, but we are sceptical of a mass move of jobs from London to other European countries.

Q: What’s your outlook for the remainder of the year?

Besides the risks posed by the EU referendum in the UK, we continue to believe that European property equities will perform well given the sector’s predictable income streams and attractive and growing dividend yields. Valuations are looking increasingly attractive, which, coupled with attractive assets and strong balance sheets means we are confident the companies we invest in remain well-placed to deliver good returns to investors.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Anything non-factual in nature is an opinion of the author(s), and opinions are meant as an illustration of broader themes, are not an indication of trading intent, and are subject to change at any time due to changes in market or economic conditions. It is not intended to indicate or imply that any illustration/example mentioned is now or was ever held in any portfolio. No forecasts can be guaranteed and there is no guarantee that the information supplied is complete or timely, nor are there any warranties with regard to the results obtained from its us.


Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Horizon Global Property Equities Fund

Specific risks

  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • The Fund's value may fall where it has concentrated exposure to a particular industry that is heavily affected by an adverse event.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.
  • The Fund may invest in real estate investment trusts which can involve different risks to investing directly in the underlying assets. Such schemes may increase risk due to factors such as restrictions on withdrawals and less strict regulation. The value of your investment may fall as a result.

Risk rating

Janus Henderson Horizon Pan European Property Equities Fund

Specific risks

  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • The Fund's value may fall where it has concentrated exposure to a particular industry that is heavily affected by an adverse event.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.
  • The Fund may invest in real estate investment trusts which can involve different risks to investing directly in the underlying assets. Such schemes may increase risk due to factors such as restrictions on withdrawals and less strict regulation. The value of your investment may fall as a result.

Risk rating

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Brexit: investment impact

Henderson's investment teams have been providing their views in the months leading up to the referendum. They now provide 'Brexit reactions' outlining how they believe the vote to 'leave' will impact their asset classes and portfolios.





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