The UK’s decision to leave the EU will trigger higher demand for prime assets in core locations as uncertainty and quantitative easing drives buyers, according to a report from Cushman & Wakefield.
The report, Brexit & The European Property Investment Market, predicts that in the short term the result is more likely to affect overall activity levels than prime values, with the latter supported by limited supply and lower interest rates. Supply will be key to determining activity, but prime yields, at least outside the UK, are likely to fall further, the report states.
UK investment volumes are forecast to settle at a notably lower level than in 2014/2015 which will offset higher volumes elsewhere, driving a modest fall in pan-European trading. Cushman & Wakefield’s currently envisages a 25% fall in the UK but growth of around 10% in the rest of Europe. Given the importance of the UK, this translates into a 6% drop for the EU overall, which compares to projections for a 9% gain assuming the UK vote had been to remain.
While the market faces a continuation of the recent investment environment in terms of high but cautious demand focused on core areas, the steady expansion of interest towards new markets may slow or higher yield premiums will be demanded. As a result, the prime to secondary yield gap may widen, pushed also by a more notable two-tier financing market.
David Hutchings, report author and Head of EMEA Investment Strategy at Cushman & Wakefield, said: “Some players will hope to stand back to see how the situation develops but for many there is a need to act with investment capital building up and secure homes for investment needed. Importantly however this is not akin to the aftermath of the collapse of Lehman’s or the eurozone crisis – we now have different opinions being voiced on what is likely to happen and these differences should create a more active market of buyers and sellers as events progress.
“In terms of what this means for investment strategy, some themes are emerging. Investors should be poised to take advantage of uncertainty or market overreactions where possible, and alert to any shifts in sentiment and geopolitics such as greater alignment with Asia.
“Domestically orientated sectors such as retail and last mile logistics look attractive targets – but only for modern property and prime locations that meet occupier needs. In the UK, global hubs such as London and Cambridge as well as other globally competitive locations will be in favour while across Europe, investors should be targeting winning European cities – Frankfurt, Paris, Dublin, Luxemburg, Milan, Amsterdam, Berlin and global markets led by Singapore and New York.
“Capital value trends are harder to judge as new assessments of risk are considered. The potential for the UK to remain in the EU must also still be considered. However, over time assuming the UK does exit, it will face a higher risk free rate, offset in the short term by lower interest rates. Elsewhere, risks to financial stability and to the EU as a whole may be factored in to pricing in some markets, resulting in a real need to focus on the fundamentals of a location and what makes it work for business, rather than just what political union or country it lies in.”