Brexit: What next?

13 September 2016

The holiday season is over, everyone is back at work, and minds are starting to turn to what happens next to commercial property values. For our part, we cannot help but feel that there is a degree of complacency in the market at the moment. Some may argue that this is not surprising given some of the strong economic numbers published since the Brexit vote; Q2, for example, saw GDP of 0.6% and a rise in employment of 172,000, albeit these figures actually recorded activity before the Brexit vote. Encouragingly, forward looking survey data published over the last couple of weeks has also been positive. Probably the most important of these is the Markit services Purchasers’ Managers’ Index PMI), which showed a sharp recovery in confidence in August after an equally sharp decline in July.

So how do we interpret this? Rather than add to the reams of speculation around the outlook for values, we have tried to apply some science by using quantitative analysis to measure the likely effect of Brexit on rents. It is worth stating that the historical correlation between the PMI survey and subsequent rental growth is high and so it is probably one of the most useful short term (twelve months) indicators available. On the basis of the average findings of the July and August surveys, our analysis suggests that we are heading for a significant economic slowdown in Q4 2016 / Q1 2017. In terms of the impact on rents, the analysis suggests that rental growth will decline from the current rate of 3.2% to -2.0% over the next twelve months.

Not a disaster, but enough to undermine the positive effect of the reduction in the discount rate which followed the Brexit vote. It is for this reason that we expect further falls in capital value, continuing until rental values settle down. At that point the market should look attractive compared to other asset classes. Until then, only those parts of the market not under threat of a rental decline will offer any short term value.

Ian Whittock
Chief Investment Officer

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