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UK

Property market implications as Britain votes to leave the EU

Brexit will bring short term opportunity for international investors but weaker occupier demand and subdued capital flows, say JLL experts


​​Brexit will bring short term opportunity for international investors but weaker occupier demand and subdued capital flows, say JLL experts

The vote for Brexit brings a new dawn for Britain, with considerable uncertainty and no real precedent but investors may seek opportunities in the short term after the pound plummeted to a 31-year low as markets open on 24 June.

"Paradoxically, investors may well identify opportunities in this market over the short-term, particularly international purchasers that can benefit from the currency arbitrage that has opened up by a weaker pound sterling," said Adam Challis, ​Head of Residential Research at JLL.

However, the London housing market will feel the effects of the Leave decision more deeply.

Challis added: "The interconnected trading relationship between London and the rest of Europe means the implications are more complex. This will exacerbate the uncertainty for London's homeowners.

"While the focus leading up to the Referendum has been on the UK's international trading relationships, we are deeply concerned that domestic politics will now be the key risk to the housing market."

Property market impacts

Independent experts suggest a cumulative loss to UK output and incomes ranging between three to 10 per cent over five years post-Brexit. While there will be fiscal savings from EU exit, but these are likely to be offset by the costs of lower growth. Beyond 2020, long-term economic performance is harder to gauge.

Here are six property market implications:

1.    Occupier demand will weaken in line with economic growth and declining business sentiment. The impact on rents may be limited by tight supply, but activity will be adversely hit.

2.    Investor sentiment will deteriorate, further subduing capital flows in the short to medium term.

3.    There is likely to be a negative capital value adjustment over next two years (estimated at up to -10 per cent with yields moving around 50bp). London sectors remain most vulnerable to correction given current keen pricing and their multinational occupier base.

4.    The residential market is expected to cool despite lower interest rates, but any correction will be mild, except in London where values are higher, making the market more exposed.

5.    For property markets, the initial correction will be most severe but this will be followed by an upturn as opportunities re-emerge in UK core markets and the benefits of a weaker sterling are recognised. Sentiment and relative pricing will be key to shore up demand.

6.    Much will depend on the speed of negotiation, the wider political picture and whether a clear and favourable direction of travel is established early on.

Regardless of the Referendum outcome, protracted political infighting poses a longer term threat to the UK economy and any chance of a timely recovery from the expected economic slowdown.

"Even if it is effectively 'business as usual' for the UK in terms of trade and legislation until 2018, such a major change will inevitably create uncertainty in the economy and real estate markets," said JLL's UK CEO, Chris Ireland.

However, he says that the impact will be largely confined to the UK in the event of a well-managed exit.