Commercial property sees ‘cooler heads’ begin to return

Commercial property sees 'cooler heads' begin to return

A recent survey has found that 36% of respondents believe the UK commercial property market is now in the early stages of a downturn.

The Royal Institution of Chartered Surveyors (RICS) Q2 UK Commercial Property Market Survey found that the industry has seen a significant drop in confidence and investor demand following the Brexit vote.

RICS’s findings are underlined by those of Lambert Smith Hampton (LSH), who found that UK commercial property prices were set to fall by 11% over the next six months as a result of Brexit.

Jeffrey Matsu, senior economist at RICS, found that during Q2 2016, investment inquiries fell sharply across the UK with the net balance falling to -16% compared to +25% in Q1.

“This is the largest quarter-on-quarter deterioration in the reading for investment demand on record.

“All sectors covered by the survey suffered a drop in investor demand, and foreign investor appetite declined at an even faster rate with 27% more respondents to the survey seeing a drop in interest.”

However, Bob Sturges, head of PR and communications at Fortwell Capital, stated that a correction in the commercial real estate sector had been predicted well before the Brexit vote.

“"But for those taking a long-term view, the positive fundamentals haven't changed.

“Every cloud has a silver lining, and I've seen authoritative reports of overseas investors ‘circling’ the UK commercial real estate funds as they prepare their sales programmes.

“An influx of opportunistic international mobile capital will, even allowing for fire-sale pricing, put a floor under the market.”

Jon Salisbury, managing director of Ortus Secured Finance, claimed that they were seeing a continuing softening of property values across the UK.

“The impact appears less prevalent outside of London. 

“However, our long-term view remains bullish and this is reflected in our lending volumes, which have increased post-Brexit.”

Ezra Nahome, CEO of LSH, believed that the devaluation of sterling and the swift appointment of a new prime minister meant that UK commercial property was an attractive proposition for overseas investors.

“It’s a stretch to say that the market is returning to normal, but cooler heads have begun to return.

“There will be winners and losers from this. Values for well-located properties with long leases will hold up well, perhaps even increasing if monetary policy is loosened further. 

“Secondary assets in the more exposed sectors are likely to see the largest price adjustments, exacerbated by increased caution among lenders.

“The regions may also outperform London over the short- to medium-term, both in terms of investment and development until we have a better understanding of the capital’s future outside of the EU.”

Ezra’s comments were echoed by Johnny Dunford, director of corporate real estate at BNP Paribas Real Estate, who noted that the market sentiment had stabilised and recovered since the early furore after the vote.

“While some investors and occupiers have taken an unsurprising pause for breath as the new business landscape emerges, there is still significant activity in the market and notable deals being done, many at pre-Brexit prices.”

Phil Clark, head of property investment at Kames Capital, said that the expectations now were that commercial real estate values were far more resilient than some initially feared.

“This is not a Lehmans moment, although uncertainty will be at the forefront of investors’ minds until the terms of trade are agreed between the UK and Europe.

“In the meantime, we have strong financial institutions that are proving to have withstood the shock of Brexit with banks in particular still lending, which is a vital ingredient to maintain liquidity in commercial real estate.”

Bob concluded that despite the recovery, it could not be denied that commercial real estate developers were pessimistic about the three-month outlook.

“Linked to uncertainty about the longer-term economic future, the effect will be to further dampen prices and activity.

“Moreover, funding is likely to become an issue as the mainstream banks rein back their lending. 

"But I make no apology for returning to the point that London is and will remain a world city of the front rank.

“Frankfurt and Paris may have pretensions to the crown and are positioning accordingly, but most objective long-term forecasting appears to favour the capital's ability to retain its place as a pre-eminent commercial real estate destination."

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