Kames Capital CIO: Brexit not a Lehman moment for UK commercial property
Stephen Jones, Chief Investment Officer at Kames Capital:
“UK commercial property has been at the epicentre of market reaction since the 23rd June UK referendum decision to leave the EU. In the midst of great near term uncertainty valuers, investors and commentators have not had concrete props to assess the value of buildings given the generally assumed deterioration in the economic outlook for the economy, and the guessed at flight from the UK by both domestic and global investing institutions. As a consequence several real estate investment funds have suspended dealing having seen investors rush to remove investments. It is important though to keep perspective, or to quote Kipling “to keep your head when all about you are losing theirs.”
“The consequence of the UK voting to leave the EU is not a global shock, it is not a Lehman type moment for commercial property in the UK. Tenants are still paying rents, space is still being taken, the supply demand balance, which has not suffered from too much speculative building as in other economic cycles, sits in a reasonable place. Deals are still being done, some at valuation, others with small chips on pricing. Property, a long term investment by anyone’s measure, may take a little longer to settle and regain its poise, but settle it will, just like other markets.
“There is also clearly a large amount of capital for property assets circling both within and from outside the UK. The commercial property market turns over somewhere between £40 to 50 billion of transactions per year. Whilst stock will need to be sold by some of the funds suspending investor activity, even an amount of £3 to 5 billion of sales to meet redemption requests is absorbable in the context of overall average activity. This at a time when UK property, to any institution looking from overseas and buying in US dollars, Yen or Euro, is 7 to 10% cheaper in exchange rate terms alone. Couple this with the fact that “safe” yields from government bonds have hit all-time lows means the value of the income from property assets, collected from good quality tenants, looks all the more valuable. In a world where central banks have moved from keeping interest rates “lower for longer,” through keeping them “lower for yet longer,” to potentially keeping them at “zero forever” the value argument for property gets ever stronger.”