Real Estate - SEPTEMBER 22, 2016

Brexit’s impact

by Jody Barhanovich

The new relationship between the United Kingdom and the European Union has yet to be mapped out, and future negotiations and unknowns will have an impact on investor and occupier sentiment. Nevertheless, the fallout from the U.K.’s Brexit referendum is expected to adversely impact commercial property metrics this year.

Colliers International’s third quarter U.K. Real Estate Investment Forecasts reports all-property total returns are predicted to fall by 0.3 percent, according to MSCI’s IPD All-Property Index, with income returns of 4.9 percent and capital growth of –5.1 percent. Meanwhile, all-property rental growth is expected to flatten in second half 2016, bringing the annual rate to 1.2 percent.

Industrial markets are set to replace office properties as the best-performing sector, with healthy total returns of 5.9 percent this year, comprising 0.5 percent capital growth and 5.4 percent income return. Industrial total returns are expected to accelerate further in the 2016–2020 period, rising to an average of 1.7 percent.

Office assets are likely to be impacted the most by the decision to leave the European Union, with total returns falling by 1.5 percent this year and rising marginally by 0.3 percent in

Retail will continue to lag behind the other property types as supermarket, retail warehouse and
shopping center performance will act as a drag. All-retail total returns are
forecast to decline to 3.5 percent in 2016 but will bounce back next year to 2.3 percent. Although forecast total returns are low, retail sales volume rose strongly to 6.3 percent year-over-year in July, with no sign of slowing in August as sales volumes surged by 6.2 percent year-over-year.

Rental growth is expected to moderate markedly in second half 2016, with the strongest property type being office at 2.0 percent, followed by industrial at 1.8 percent and retail at 0.5 percent. However, in the 2016–2020

period, industrial is anticipated to take over the reins, with rental growth averaging 1.7 percent annually, followed by office at 1.2 percent and retail at 0.5 percent.

In the investment market, office was the most sought-after asset class, representing 39 percent of all acquisitions. Industrial increased its share to 12 percent in the year to August (7 percent in 2015) and was the only sector to not see a market fall in trading volume compared to last year.

Purchases in the first eight months of 2016 were dominated by overseas investors, with their £12.2 billion ($15.8 billion) worth of purchases amounting to 42 percent of all transactions.

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