Guy Barnard, Manager of the Henderson Pan European Property Equities Strategy and Co-Head of Global Property Equities, responds to the UK’s decision to leave the European Union (EU).
The full implications of today’s decision by the UK to leave the EU will take many months, if not years, to become clear. However, the short-term economic impact is undoubtedly negative given the uncertainty surrounding the UK’s trade renegotiations along with the knock-on impact to the rest of the EU, where political tensions will undoubtedly increase. All of this will undermine investor confidence and delay business and investment decisions.
For real estate markets, the impact is twofold. Firstly, what will this do to investor demand? Short-term, given heightened uncertainty, demand is likely to drop significantly as prices adjust downwards and find a new level, along with other asset classes. While potentially substantial, we do not expect price falls to be as significant in the UK as they were during the financial crisis, given leverage in the sector is far lower today and we have a stronger banking system. We may also see some support from central bank easing and ever-low bond yields. Additionally, weaker Sterling may attract international investors, as it did after the financial crisis. Secondly, what will happen to tenant demand? Rental growth is highly correlated with economic growth, so we would expect to see weaker demand caused by economic uncertainty putting pressure on rents. The London office market will be most exposed given demand from financial and multinational occupiers will weaken as they decide how this will affect their businesses going forward.
All of this will take time to feed through to property markets and pricing, but the stock market and the listed real estate securities we hold will look to price this in immediately, leading to significant declines in share prices. We can take some comfort from the fact that the companies we hold have long-dated income streams and balance sheets that can absorb material price declines.
Today is unlikely to be a day to make significant portfolio moves. Market volatility will likely create some opportunities, but initial reactions tend to be extreme.