Brexit ‘no deal’ risk spikes investors’ jitters

The UK’s failure, to date, to agree its exit from the EU is causing angst amongst investors either seeking to sell or acquire assets, warns Cushman & Wakefield.

The global real estate brokerage firm said baseline predictions suggest weak or negligible economic growth for several quarters in the event of a no-deal Brexit, with some forecasters predicting that the UK will enter into a recession. The wide variation in forecasts underlines the uncertainty in the market, Cushman added.

Elizabeth Troni, head of EMEA Research and Insight at Cushman& Wakefield explains:

“Growing prospects of no deal and a weaker economic outlook have continued to send equity markets lower, with UK REITs falling more than the wider market. With the exception of logistics and alternative sectors, most REITs trade as significant discounts to NAV. Brexit and political uncertainties has led to gilt yields falling from 1.57% to 1.28% over the quarter.

“Five-year swaps also fell over the quarter as prospects of a hard Brexit imply rates will remain lower for longer. Whilst lower rates may benefit investors, the most recent Bank of England credit conditions survey showed historic and forward-looking indicators were sharply negative in Q4 2018 pointing to a reduction in the availability of credit and expectation that levels of trading will remain weak in the near term.”

Negative sentiment has impacted inflows into funds. In the year following the vote to leave a net £1.5bn was withdrawn from funds, according to the Investment Association. Since then, less than a net £100m has been added. Whilst funds are holding positive cash reserves, any spike in outflows could place pressure on funds to sell.

Cushman added that a gap between buyer and seller expectations on pricing has emerged amid continued uncertainty, which is causing deals to take longer to close. Many investors are unwilling to sell at lower prices and instead hold off from bringing assets to the market, despite active demand. Pricing is expected to stabilise with softening in some segments, according to Cushman, as activity is expected to remain weak in the first half of 2019 with some upside if news flow on Brexit improves.

Will Robson, global head of real estate research at MSCI, said:

Although real estate investors have historically focused on their domestic markets, investors are continuing their gradual shift away from this home bias. Many real estate investors who have diversified globally are encountering geopolitical risk, however: 2018 was a year of political discord in both developed and emerging markets, with continued uncertainty in the UK arising from the Brexit referendum, the nationwide protest movement in France, the longest government shutdown in U.S. history and ongoing U.S.-China trade tensions.

“The increasingly international nature of real estate capital markets means that investors may not be able to escape these global risks. Global Gateway Cities are particularly exposed to such capital flows. In this context, we anticipate that political uncertainty will likely remain a top risk for real estate investors in 2019.”

james.wallace@realassetmedia.com