As the old saying goes, if life gives you lemons, make lemonade. The British electorate arguably dealt the UK economy a rather big lemon in the shape of the “leave” vote.
The initial market reaction was undoubtedly a fairly negative one but now, a month and a half later, relative calm seems to have been restored. So, following on from Damian Wild’s 10-point post-referendum action plan a couple of weeks ago, I would like to offer my own top 10 reasons to be cheerful.
1. After their post-referendum falls, stock markets have bounced back, including the domestically focused FTSE 250 index. This signals greater confidence from investors -following the initial Brexit-induced panic.
2. While economic growth is now expected to slow markedly over the short-term, the consensus remains that expansion will continue and we will avoid a recession.
3. The new government is in place, at least removing one level of uncertainty, and it is focused on striking productive trade deals with major economies outside the EU and potentially delivering a business-friendly message on tax and regulation.
4. The UK remains one of the world’s major commercial property markets, offering high levels of liquidity, transparency and a wide range of opportunities that we believe will continue to attract domestic and international investors over the long term.
5. The UK market is in a much stronger position than it was before the financial crisis. Capital values are some 20% lower than they were in 2007, there are few pockets of over-development, and debt levels are relatively muted.
6. The likely falls in property prices that are already beginning to be seen will present attractive investment opportunities and the potential to tap into stronger-than-previously-expected total return prospects over the medium term.
7. The more competitive exchange rate is already attracting some interest from foreign institutions, and that trend is likely to intensify in the coming months.
8. Although the suspension of a number of daily-dealing property funds (including our own) aimed at retail investors generated some negative headlines, they have given managers of those funds time to dispose of properties in a controlled way, thus protecting value for all investors. This is in fact the intention of the suspension mechanism. Anecdotal evidence suggests that sentiment among retail investors has started to stabilise.
9. With government bond yields having reached record lows, commercial property offers an attractive premium, with relative value supported by even more supportive monetary policy.
10. Property with inflation-linked rent reviews (particularly in the long income space) is likely to become increasingly popular, particularly if currency weakness and additional stimulus lead to a pick-up in inflationary pressure. Other sub-sectors such as rented residential and logistics will show resilience.
The UK property market has delivered strong risk-adjusted returns over the long run and has weathered bigger storms than this. Furthermore, our view is that Brexit will not in fact be the primary determinant of UK real estate returns over the medium to long term. Instead, the key driver will be the global economic cycle, of which the property market is an inextricable part. Greater forces are at play, and wise investors may have been trimming risk positions accordingly in recent times.
In the shorter term, property investors need to be prepared for more turbulence. But for our part, we are confident and optimistic about the prospects of the asset class and remain firmly of the view that well-constructed portfolios of good quality income-producing assets will perform well over the long run.
Alex Jeffrey is chief executive at M&G Real Estate
