The relatively calm and stoic response of the real estate markets during the post-referendum summer looks to be carrying through into autumn.
The market is functioning: there is no shortage of liquidity among debt and equity participants; transactional activity is more muted but nevertheless evident; and occupational statistics show positive signs.
Employment figures also remain strong and, coupled with upbeat retail volumes, give no obvious signs of looming recession.
However, the ‘Hard vs Soft’ Brexit debate is stirring a number of economic forces that have lain dormant for some time.
After the Conservative Party Conference, sterling intensified its decline against a basket of currencies, most notably the US dollar. In fact, sterling has underperformed such heavyweight currencies as the Haitian gourde, Angolan kwanza and Tajikistani somoni during the year.
Inflation figures for September showed the biggest monthly rise in the Consumer Prices Index since 2014 and some saw it as a harbinger for further inflationary forces at play.
4% inflation in 2017?
Top-end forecasters predict inflation north of the 3% mark in 2017 - with some even above 4% - but whatever the precise levels may be, the effect of weakened sterling and the recent upward trends in energy prices will inevitably place inflationary pressure on the economy. The market will be looking to how property might respond.
Key to the prognosis will be how the Bank of England (BoE) reacts and what that means for interest rates.
The market on that front is getting twitchy: faced with the possibility of above-target inflation, UK swap rates have doubled during the past month. This implies a consensus that sees a further rate cut this year as unlikely, with some even betting on a rate rise in the coming years.
Sharp rate increases would be destabilising for property generally and particularly punitive for residential, where the UK house-price-to-income ratio is running at near-historic highs of 6:1 and a generation of buyers are accustomed to ultra-low mortgage rates.
While protecting house prices is not high on the government’s agenda, the BoE is acutely aware of disrupting prices. BoE governor Mark Carney in particular is against a rapid tightening of monetary policy and openly stated he will prioritise employment and the wider economy at the expense of overshooting inflation targets.
But the longer low rates continue, the greater the embedded risk and the more challenging they will be to unwind. On inflation and property more generally, the jury’s out on how resilient an asset class it is, but most conclude it is at least a partial hedge.
Certain sectors will offer better protection, depending on how quickly the income profile can react to capture upward prices. Higher-frequency lease turnover assets - hotels, self-storage, AST residential, student housing - offer a more natural hedge and track inflation better than longer-let properties without inflation-linked rental uplifts.
Historically, REIT returns, particularly in the US, have tended to offer a real rate of return over and above inflation levels. The 1974-81 period was the most inflationary in the history of the CPI index, but REIT returns easily preserved purchasing power.
Brexit hasn’t happened yet and the real tests lie ahead
On the debt side, those with longer-term facilities locked into today’s low rates will benefit from inflationary pressures reducing their real cost of borrowing. But Brexit hasn’t happened yet and the real tests lie ahead.
Likewise, the longer time goes by without any clarity on what politicians are prioritising in Brexit negotiations, the more impatient key decision-makers across the private sector will become with the UK’s perceived instability.
The market may continue to shrug off any potential inflationary pressures and to weather the Brexit headwinds. It has shown itself to be pretty thick-skinned in the past few years.
Richard Craddock is a director at Wells Fargo Commercial Real Estate