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Brexit bounce for commercial property

Brexit bounce for commercial property

As we all know, the UK’s vote to leave the EU in June took the markets by surprise, leading to a depreciation in sterling and an initial kneejerk slide in UK equities. It also represented another nail in the coffin for the political polling industry after its failure to predict a Conservative victory in the 2015 general election. 

Equally surprising perhaps has been the resilience of much of the economic data, which so far has defied the gloomiest predictions of the UK being plunged rapidly into recession. Exports are benefiting from the weakness in sterling, retail sales have been strong and consumer confidence has proved robust.

Indeed the IMF, which intervened very publicly in the campaign with stark warnings about the impact of the vote, has since admitted it was overly pessimistic and forecast that the UK will be the fastest growing G7 economy in 2016, while continuing to signal a negative impact beyond. 

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Neither did the vote for Brexit trigger a systemic meltdown in global markets as some had feared. Indeed, the UK equity market has bounced back strongly on the tailwinds of the favourable impact of overseas earnings being translated into a weaker pound, as well as ultra-accommodative monetary policy.

Does this mean from an investment perspective Brexit has been a storm in teacup? The answer to that is no, as the UK is only at the start of a divorce process, the outcome of which is far from clear and there will be many moving parts.

Take for example, sterling weakness, which has dominated recent headlines. This is a double-edged sword that on the one hand improves the export competitiveness of some firms, but on the other hand will also have an inflationary impact that will hike input costs.

While the post-referendum economic picture has been better than expected so far, these are undoubtedly early days and bumps must be expected in the road ahead as negotiations on the terms of the UK’s exit begin next year.

For UK investors and advisers, one of the key stories in the immediate aftermath of the vote was the freezing up of many of the industry’s open-ended commercial property funds. But this was a story that began to take shape well ahead of the referendum vote, as funds had already seen a trend of outflows since the start of the year as forecast future returns had mellowed and risk-aware investors had been reducing exposure to illiquid assets.

This steady trend of outflows during the months in which much of the investment industry and public expected a “Remain” result will have likely seen cash buffers reduced at some funds. 

When confronted by the shock outcome of the vote, and in the absence of actual transaction data, groups started to apply adjustments to portfolio valuations to err on the side of caution.