BREXIT PUSHES SPECIALIST SECTORS CLOSER TO THE MAINSTREAM We approach the end of the first month in our new world with the property market in focus during the initial uncertainties. Headlines about the stresses being experienced by parts of our Fund industry and the early share performance of many REITs suggest a significant shift in sentiment for the real estate market. The specialist markets have not been entirely insulated from these effects but largely pricing is holding up, with transactions continuing, less volatility in the REITs, and Funds active in our areas. The Healthcare and Leisure markets could now continue and even accelerate their trajectory to the heart of real estate investment strategy. We share here the activity and reactions around the specialist markets to date, look at what we have seen emerging, areas where there is less clarity and some possible trends as we head to calmer waters.
Steady rental and return growth with reduced capital value appreciation Rental value growth for All UK Property matched the trend seen so far in 2016 despite uncertainty due to the EU Referendum. In June 2016, total return for All Property once again remained stable at 0.6%. The combined results for Q2 show rental value growth of 0.6% and capital value growth of 0.5% for All Property.
On Thursday 23 June the UK population voted by 51.9% to 48.1% to leave the European Union (EU). Turnout was 72%, with a record 46.5 million people eligible to vote, causing Prime Minister David Cameron to resign. In voting to leave the EU, the UK has made probably its most profound economic and political decision in 60 years – a decision seemingly reflecting our identity as a nation, our values, our dissatisfaction with the EU economic and legal model, a rejection of integration and globalisation, and dissatisfaction with ‘the establishment’. But what happens next, and what does it mean for real estate? In this note we sketch out some of the big issues to watch.
Commercial property prime rental growth at post crisis high Rental values for UK prime commercial property grew by 1.4% in the first three months of 2016. The average prime yield for All Property remained relatively flat in the quarter, up slightly from 5.3% to 5.4%. All Property estimated capital values grew by 1.2% during Q1. Prime Industrial property led the way, with rental growth increasing to 2% in the first quarter, the third steepest quarterly increase the sector has seen since 2001. Rental values for prime Central London offices increased by 2.6% over the quarter, driven by the strong performance in the City (4.6%) and Docklands (5.4%).
THE HEALTHCARE MARKET REATION TO BREXIT Health & Social Care fundamentals remain unchanged; demand will continue to grow, requiring a real estate response and the occupational market is unlikely to be negatively impacted. Healthcare REITs have materially outperformed Core Real Estate over the last 2 weeks. We consider it likely that in the short term, the UK Government will spend more on the NHS. The movement in gilt pricing makes Long Income Real Estate more attractive whilst the change in Sterling should benefit overseas investors. Trade Buyers who can see their way to add value by strategic moves or by driving operational performance now have probably their best opportunity for years.