BMI View : The UK ' s vote to leave the European Union will have a far r eaching impact on the economy . BMI forecasts that the economy will slow in 2016 and 2017. The impact of such a slowdown will be felt across all sectors of the economy, including the commercial property market. Occupier and investment activity is expected to fall back in all three sub- sectors that we cover in response to economic and regulatory uncertainties as companies and investors pause to take stock of the implications of Brexit.
On June 23 2016 the UK voted to leave the EU. The immediate consequence of the Leave vote was the resignation of the prime minister, David Cameron, and a shock in the financial markets globally. It is too early to assess the impact and to get a full understanding of the direction which the UK economy is likely to take in the medium to long term. One thing that is clear, however, is that the UK has entered a period of economic and political uncertainty. There is much debate as to when 'Article 50', which activates the process leaving the EU, is likely to be invoked. Political consensus seems to point towards the end of 2016 or early 2017. But even if the process gets underway by the end of 2016, uncertainty about the future is likely to continue to affect businesses until the UK's settlement is completed and its implications fully understood. Furthermore, although a new prime minister is now in office, the Brexit vote has raised the possibility of another Scottish independence referendum and has raised questions over the future of the UK and the political and constitutional landscape.
Post-referendum the UK economy is expected to see slower growth, at least in the short term. The main reason is uncertainty about how UK's relationship with the EU will work. This uncertainty is expected to hit confidence, with businesses adopting a wait-and-see approach to investment and expansion plans. We have downgraded our outlook for GDP growth over the coming years , lowering it to 1.4% in 2016 and 0.2% in 2017, before a recovery begins.
The course the economy takes in the next few years will clearly have a significant impact on all areas of the economy, and commercial property is no exception. The office sector is most exposed to the impact of the referendum because of the dominance of the services sector in the UK economy. We expect to see activity levels slowing in the coming months, as companies, particularly large corporate occupiers , defer decisions on investment and hiring. The financial sector is expected to be disproportionately affected because of the importance of 'passporting rights', which permits financial institutions based in the UK to operate anywhere in the EU. A loss of this could see some jobs being relocated to other EU countries. Frankfurt and Paris are the most likely destinations if financial services jobs were to leave London. While the full impact on the occupier markets will take time to play out, the effect on rents could be relatively limited compared to the 2008-2009 cycle because of current low vacancy rates and tight supply conditions in London and in the major regional markets.
The industrial sector will also to be affected significantly by the vote. Occupier demand is expected to soften in the next two years as the economy slows. The lower value of the pound should help improve competitiveness and boost exports, but the medium-term outlook will depend very much on the UK's new trading agreements with the EU and elsewhere. Europe is the UK's major trading partner, and while in the short term, before the UK actually leaves, the existing and established relationships in terms of trade will remain in place, more certainty about future trade relationships and regulatory environment is needed if businesses are to invest confidently. Uncertainty about future trade agreements with Europe and indeed with other parts of the world is likely to weigh on the industrial and logistics commercial property sector in the short term. Limited speculative supply will help to support rents, but we expect pricing for investment assets to come under downwards pressure in the short term.
The retail real estate market is likely to be more resilient than both the office and industrial sub-sectors. This is because the retail sector in general has performed well in the past few years and has been adapting to structural changes. The health of the housing market and general consumer confidence will be key in determining the degree of resilience in spending levels in the coming months. The depreciation of the currency will attract more tourists, particularly to London, and help to offset some of the negative impacts of rising prices and higher inflation. Prime, relevant retail units will prove more resilient, but weaker and secondary retail assets will be more vulnerable.
On the whole, with the UK's settlement agreement yet to be decided and many of the EU regulations to be untangled, flexibility is likely to be the key word for businesses as they seek to respond and adapt to an evolving economic and regulatory framework.
The United Kingdom Real Estate Report features BMI Research's market assessment and independent forecasts of major construction projects in the residential and commercial markets, plus rental prices and yields in major cities. The report critically analyses the prospects for real estate within the broader economic and financial context - both domestic and global - via our econometrically-modelled and clearly explained banking and economic forecasts and follows this through to evaluate the implications for REITs.
BMI's United Kingdom Real Estate Report provides industry professionals and strategists, sector analysts, business investors, trade associations and regulatory bodies with independent forecasts and competitive intelligence on the real estate industry in United Kingdom.
- Benchmark BMI's independent real estate industry forecasts for United Kingdom to test other views - a key input for successful budgeting and strategic business planning in the British real estate market.
- Target business opportunities and risks in United Kingdom through our reviews of latest industry trends, regulatory changes and major deals, projects and investments.
- Assess the activities, strategy and market position of your competitors, partners and clients via our company profiles (inc. SWOTs, KPIs and latest activity).
BMI Industry View
Summary of BMI’s key industry forecasts, views and trend analysis covering real estate and construction, regulatory changes, major investments and projects and significant national and multinational company developments.
Industry SWOT Analysis
Analysis of the major Strengths, Weaknesses, Opportunities and Threats within the real estate sector and within the broader political, financial, economic and business environment.
Industry Forecasts Outlook
Historic data series (2010-2013) and forecasts to end-2019 for the domestic real estate industry and for the local and global finance industry.
- Real Estate: Office, retail and industrial real estate yields for all major cities (%); short term forecasts on minimum and maximum real estate rental prices by sub-sector (USD per square metre and local currency per square metre).
- Construction: Industry value (USDbn); contribution to GDP (%); employment (‘000); real growth (%).
- economy: Economic growth (%); nominal GDP (USDbn); unemployment (%); interest rates (%); exchange rate (against USD).
BMI’s Real Estate Risk Reward Index
BMI’s Risk Reward Indices provide investors (real estate vendors, construction companies and financial investors) looking for opportunities in the region with a clear country comparative assessment of a market’s risks and potential rewards. Each of the country markets are scored using a sophisticated model that includes more than 40 industry, economic and demographic data points to provide an indices of highest to lowest appeal to investors, with each position explained.
Overview of the real estate sector, including analysis of existing/planned real estate developments and emerging industry trends in the office, industrial and commercial sectors
Features detailed city-level data and analysis on rental prices, yields, contract terms and real estate availability with separate chapters covering the office, retail and industrial sub-sectors.
Examines the competitive positioning and short- to medium-term business strategies of key industry players. Strategy is examined within the context of BMI’s industry forecasts, our macroeconomic views and our understanding of the wider competitive landscape to generate Company SWOT analyses. The latest financial and operating statistics and key company developments are also incorporated within the company profiles, enabling a full evaluation of recent company performance and future growth prospects.
*Company profiles are not available for every country. Those reports instead contain information on the current activities of prominent companies operating in the market.