I wrote almost a year ago that the impact of Brexit on the UK real estate market was uncertain but it did not feel like the disaster some had predicted.
This has remained the case throughout 2017, which has proven to be a much stronger year than many anticipated. The wider UK economy too has continued to show modest growth, with consumer spending holding up and low unemployment levels continuing.
However, as we look towards 2018, new challenges are looming. New Office for Budget Responsibility data suggests that economic growth is expected to slow year on year.
Base rates are likely to rise again throughout next year and it remains to be seen whether this could lead to an increase in investors deciding to bring assets to the market, which may in turn cause pricing to soften.
Many are concerned about how investment restrictions in China will affect capital flows into the UK and other international real estate markets in the short to medium term. This is because, given the huge transactional volumes undertaken, Chinese investors have largely been responsible for underpinning the UK investment market in the past 12 months. Advisers will no doubt be working hard to see whether there are ways around the restrictions.
Another potential huge spanner in the works in the recent Budget is that there will be a consultation making non-residents subject to capital gains tax when they sell UK commercial real estate. The proposed changes will apply to increases in value from April 2019.
Arguably, this would ‘level the playing field’ with UK investors and bring the UK into line with the US, Germany other leading G20 countries, but with the continued uncertainty around Brexit and the wider political scene in the UK and where we are in the property cycle, it seems extraordinary timing to announce something like this.
On the positive side, there is plenty of available debt, and new sources of capital (domestic and foreign) seem to emerge on a daily basis. For example, Aviva Investors is set to launch its first REIT to focus on long income. It is easy to see the appeal of long, secure income at a time when there is so much domestic uncertainty.
So although there may be plenty of investors in the market with capital to deploy, few feel that the market will run away from them. One thing is certain, however: uncertainty is the new norm.