Now whilst I have always admired the natural exuberance and optimism of the UK brokerage community, I suspect that only the most optimistic of their fraternity could genuinely express this view with a truly straight face; based on uncertainty alone, it is surely difficult to argue that the average asset can be worth more today than it was on the 23rd June.
On a positive, I can say with a reasonable amount of confidence that the world has definitely not fallen apart. Yes, the “liquid” daily priced retail funds were impacted by a raft of redemptions by panicking investors (as an aside, I do wonder sometimes whether the UK press has decided that their role in life is to be the never ending prophet of doom, their aim being to create a self-perpetuating cycle of negativity). And yes, the need to create additional liquidity by selling assets quickly, inevitably affected value. However, on the whole, investors are not over exposed to debt and, setting aside the retail funds, there have been very few other “forced sellers” – and frankly, why on earth would you sell now if you do not need to?
The KFIM take on life is that over the next 12 to 18 month period (once the Brexit negotiations get into full swing), we will see a degree of outward yield movement, with average values falling by somewhere in the region of 10%; there is no great science to this figure, it simply reflects the collective views of what I might call the KFIM “elders”. However, we do not expect the impact to be consistent across the entire market with, for example, long leased high quality assets performing relatively well; we have even heard rumours (unsubstantiated I might add) that some of the long lease assets sold post Brexit by the retail funds actually achieved prices ahead of their pre-Brexit valuations.
Over the medium term we remain reasonably positive. There are a number of reasons for this:
· Brexit has almost certainly signalled a premature halt to the development pipeline (which, unless you are a developer, should be a positive since it will serve to restrict the supply pipeline)
· Irrespective of Brexit, it is important to remember that we were already approaching the latter part of the UK market cycle. As such, the market will probably re-set at a lower level than it would otherwise have done making any downturn shorter, subsequently with a faster recovery, and;
· Based on conversations that we have had with Clients in both Asia and the Middle East, it is clear that the overseas investor remains keen to invest and still consider the UK to be one of the most transparent and liquid real estate markets in the world.
So whilst there are undoubtedly still some headwinds, and whilst we do anticipate further falls in value, as long as both the UK Government and the EU adopt a positive approach to negotiations, we expect this to be a bit of an uncomfortable bump in the road rather than a 2008 style market downturn. For those with existing assets, the message is “don’t panic, keep calm”. For those with cash, the message is “be patient, but do not be afraid to press forward for the right quality asset”.
CEO, Knight Frank Investment Management