Brexit uncertainty is hitting confidence

Confidence in the U.K. commercial real estate market will unquestionably fall as we enter into a period of heightened economic and political uncertainty that no one can define or quantify.

It will most likely take several years for people to fully understand the implications of this decision.

The question is whether resultant pricing volatility is a fair reflection of inherent risks or a potential mispricing opportunity.

Prior to the EU Referendum, transaction volumes were already down 50% in the year to date compared with the same period in 2015. We anticipate volumes to remain modest for the rest of 2016 as investors assess the implications

As we saw in the aftermath of the 2008 financial crisis, we can expect real estate investors to seek refuge in the relative safe harbour markets like London West End or long leased assets. However, unlike then, values are already 10-20% above long term levels.

Many investors will be turning their attention to the occupier market, in particular evaluating the impact on financial and business services companies; anyone with those type of tenants are going to be more circumspect but the impact won’t just be confined to London. We can expect to see a ripple effect across the country.

Bournemouth for example has a high proportion of people employed by financial service companies - it would be naïve of us to think the impact will be contained to the capital.

So long as occupiers remain cash generative, we’re unlikely to face a material pricing correction arising from weak fundamentals. Supply of new space remains very constrained and vacancy rates in the key cities across the UK have largely recovered.

Furthermore, having short leased assets doesn’t necessarily mean occupiers will move out. Fidelity’s experience suggests less than 25% of occupiers chose to exercise their option to terminate leases or move at expiry. Rather than selling or buying real estate ‘markets’ a greater emphasis will need to be placed on underwriting the occupiers and the certainty of their cash flows.

As with most clouds, there is a silver lining. Over the last 12 months international buyers accounted for 40 percent of commercial property deals in the UK; a near doubling within ten years.

The relative attractiveness of the UK market is explained by a strong economy but also a relatively weak currency. In US$ terms, the UK real estate market is now back to pre-2004 pricing levels – the question is whether international investors will view this as an attractive entry point or defer making a decision.

Adrian Benedict is real estate director at Fidelity International