It has been impossible to pick up a newspaper, turn on the radio/television or look at on-line news/social media without being bombarded by extremely repetitive commentary about Brexit and the adverse effects which it is having on our economy; and in the property press, the effects it is currently having upon the property market. Whilst it is undeniably true that virtually all sectors of the property market have started to show signs of a slowdown, the property market is extremely complex and is influenced by many factors, of which Brexit is only one.
During the past few years the property market, both for occupation and for investment purposes, has been extremely strong with yields/returns reaching the lowest levels that I have seen in my lifetime. This is of course at a time when returns from virtually all classes of investment have also been very low.
The first sector of the property market to show signs of slowing was perhaps residential, with the slowdown in the growth in capital values initially becoming apparent in central London, particularly with respect to higher priced units, but subsequently producing a ripple effect out into the South East. The most recent reports that I have seen suggest that capital values in Kensington and Chelsea, the most highly valued Borough in London, have fallen by an average of 21.2% over the past 12-months, whereas outside London and the South East values have continued to grow by an average of up to 6%. Nationwide Building Society reports that overall average growth across the UK in 2018 was just 0.5% down from 2.6% in 2017. In our experience, across Kent values have generally levelled off over recent months, with the slowdown being more pronounced – or felt earlier – the closer one gets to London.
As far as volumes are concerned, in recent months there has certainly been a reduction in demand and a slowdown in the numbers of properties being sold, albeit was recently reported that nationally the total number of sales in December at around 100,000 was very much in line with the long-term average.
Whilst the uncertainties caused by Brexit and the resultant paralysis of investment by businesses (leading to employment uncertainty), without doubt has been a contributory factor in the slowdown of the residential market, this would almost certainly have happened to some degree due to a natural cycle in the economy and the property market, both due for a downturn after a prolonged period of buoyancy.
Although values are likely to slide in the short term, we would not expect to see any dramatic changes, because availability of residential property will continue to be outstripped by demand, which in turn will largely underpin current values.
The principal factors affecting the private rented sector are government intervention. Tax changes over the past year or so have made the buy-to-rent sector far less attractive as an investment, particularly to small-scale investors with one or two properties where returns have often drifted into negative territory. This has resulted in a number of investors pulling out of the market and, as a consequence, the availability of rental properties has declined. A wholly predictable outcome at a time when everyone is highlighting the shortage of residential accommodation! This position is only likely to be exacerbated by the outlawing of tenant fees, which comes into force in June. Outside London profit margins for residential letting/management agents who operate professionally and within the law are slim, so the abolition of these fees is likely to result in costs being passed to landlords, which in turn will lead to an increase in rent and/or more landlords pulling out of the private rented sector. This will almost certainly mean that tenants will have to pay more and have less choice. A prime example of a government ‘playing to gallery’ to achieve positive sound bites in the press, rather than making policy to improve the lot of the tenant!When considering the commercial property market, by far the worst affected is the retail sector, albeit with average prime rents having grown by 6% above the financial crisis low point. Again, while Brexit plays its part a far more significant factor is the change in shopping habits from High Street to on-line. This trend has been growing for some time and is likely to continue for the foreseeable future.
We are currently going through a phase where many well-known retailers have, or are getting into financial difficulties and stories have been hitting the headlines on a daily basis. There are again multiple reasons for this trend not least being trapped in long term leases from which they are unable to escape and high business rates. Both of these are contributory factors but mis-management and failure to adapt to changing market trends are at the core. Many of these companies have been in financial difficulty for quite some time, propped up by the long period of historically low interest rates.
In the short term this trend is likely to continue, albeit over time high streets will adapt (and some are already beginning to) by accepting a greater mixture of uses and not just relying upon the traditional retail model to maintain vibrancy and attract new businesses.
The prime office sector has also shown considerable rental growth over recent years, producing average rents some 16% above the pre-financial crisis peak, and with capital values growing even more as a result of the reduction in yields over the same period. In recent months, however, rents have been fairly stable, only showing relatively modest growth. Whilst this growth has partly been driven by demand, to a large degree values have been supported by a shortage of available accommodation. Stock has declined due to permitted development rights, enabling investors to convert office buildings to residential use without the need for the costs and time delays of the full planning system, coupled with the relatively few new office buildings that have been constructed.
There are signs locally that demand has softened in recent months, albeit as a result of multiple factors including Brexit, but also the general economic and property cycle referred to above, as well as changes in the way that businesses operate due to a growth in the use of technology.
Although humans innately like to work and interact with each other, thereby preventing the wholesale downsizing of office space as predicted on numerous occasions, improvements in technology in particular have coincided with a growth in the desire for flexible working from both employees, and in many cases employers. This has resulted in growing companies often finding a flexible working/technological solution to their increasing staff needs, such as allowing employees to work remotely for a day of two a week. This is a trend which is likely to continue.
As with the other property sectors, the uncertainties caused by Brexit has undoubtedly tempered businesses investing in new property, at least in the short term, albeit that the overall picture is far more complicated.
By far the most buoyant property sector over the last few years, both from occupiers and investors, has been the industrial/warehousing sector. Demand for ‘sheds’ has grown considerably, partly fuelled by the growth of on-line retailing. This is shown by transactions such as the construction of a number of new distribution depots across the country for Amazon, including a recently completed shed of 366,000 sq ft (34,000 sq m) in Medway.
Average rents are now some 11% above their pre-financial crisis levels, and whilst the market has shown signs that it is starting to slow, this is as much a result of a shortage of available quality stock as it is a decline in demand.
One direct effect of the uncertainties surrounding Brexit, and the increasing risk of a ‘no deal’ Brexit, has been a strong demand for warehouse space and in particular refrigerated space. This is to allow stockpiling of merchandise and in order to house perishable goods during the expected delays that may occur at customs’ points such as Dover.
Whilst we therefore anticipate that overall the property market will be quieter over the next year or two than in recent years – and the uncertainties surrounding Brexit have undoubtedly contributed to the recent slowdown – Brexit is far from the only factor at play. Whereas some sectors and locations have been affected more acutely than others, such as those most heavily reliant upon international trade or investment, others are less affected by Brexit and far more by other factors as outlined.
As in previous downturns, there will be plenty of activity in the property market as life still goes on. We all need somewhere to live and to operate our businesses from.
Whilst Brexit and the slowing down of the economy will provide difficulties for some, it will conversely create opportunities for others.
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