M&G Real Estate has predicted that City of London offices will be the sector worst affected by the Brexit vote.
Research by the firm has outlined the likely impact of uncertainty across all sectors.
Key findings
• In the short term, uncertainty is likely to prompt businesses and investors to postpone plans, affecting rental growth and capital values.
• A broad portfolio, well-diversified across sectors and locations, should help maintain values.
• Any market turbulence could present attractive investment opportunities for long-term investors.
• City of London offices are likely to be the most affected, other sectors to a lesser degree.
• In the medium to long term, the UK is likely to reassert its economic might and the attractions of its property market.
Central London offices
Offices in central London were likely to be the hardest hit owing to the prevalence in the area of financial services firms and other multinational corporations that may need to relocate some operations to EU states.
However, M&G said a “softer landing” for the sector could be achieved by developers postponing some speculative schemes, particularly those scheduled to complete in 2018 and 2019.
After a “period of weakening”, opportunities could arise to buy in London at a discount, according to the research.
They also noted that large legal firms, located mostly in the capital’s Midtown, were likely to benefit from the large amount of legal work required by the EU treaty renegotiation process.
Offices outside London
This sector was likely to be damaged by the weaker economy and by some firms downsizing their UK operations.
However, M&G said this sector was likely to be less adversely affected than London.
Industrial
Manufacturers of goods for export will be at the mercy of the UK’s post-Brexit trading agreements, M&G said.
However, some large manufacturers have already committed to staying in the UK.
The weaker sterling and the high cost of relocation, as well as the difficulty of sourcing alternative locations in a short timeframe, should mitigate much of the damage.
Even if some international firms working within the EU were to relocate, it is possible that many will seek to retain exposure to an economy that has outperformed the rest of Europe in recent years.
Retail
The sector is unlikely to be affected beyond the more general impact of a weaker economy, which would hit consumer spending and demand for space.
These effects would be temporary and more defensive retail sectors such as supermarkets would hold up relatively well.
Tourism is unlikely to be negatively affected unless the UK imposes tighter visa controls for EU nationals. A weaker pound could attract more tourists to the UK and boost demand for domestic tourism.
Private rented residential sector
The impact on PRS is likely to be “fairly balanced”, M&G said.
In the longer term, housing demand may be hit by changes to UK immigration rules, although supply is also likely to react accordingly. Some occupancy driven by financial and business employers in the City of London could fall.
However, for the country as a whole, there could even be a short-term pick-up in rental growth as more people choose to rent during the period of uncertainty.
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