With the EU referendum out of the way, it would be nice to think that all the uncertainty leading up to the vote would be out of the way. It's not, and for property and housebuilders the uncertainty is set to continue for some time yet. The first few hours of trading saw both sectors take the inevitable knock as investors overreacted in time honoured fashion. But is this justified? Let's tackle the potential bad news first, and it must be stressed that none of this is set in stone. We are as ignorant of the full implications as we were before the referendum.
London; the bad news...
London will take the biggest hit because it is the financial centre of the world. Estimates vary, but as many as 200,000 jobs could go, which equates to around 2 per cent of London's working population. In property terms, this would lead to about 17m sq ft of commercial property coming back onto the market; the equivalent of about 8 per cent of London's office space. With vacancies springing up everywhere, property values could fall by as much as a third. The other worry is that it had been widely assumed that capital growth would be replaced by higher rents as the primary growth driver. But with the prospect of falling values and downward pressure on rent as the supply/demand imbalance shrinks, many property companies could be ex-growth.
The good news...
This could all be an overreaction because only 3 per cent of jobs in London are in EU financial services, and despite a widely held belief, the entire financial services sector accounts for just 16 per cent of office-based jobs in London. Scientific and technical sector jobs account for double this, and have taken up a third of all new office space in the last two years.
Meanwhile, in the real world...
Other property assets will underperform, but maybe not by as much. Commercial property relies a lot more on the health of the domestic economy, and there is little doubt that economists will be reaching for their red pens and downgrading GDP forecasts. However, we will still be shopping, and companies will still be expanding their distribution centres to cater for the switch to online purchasing, click-and-collect, and a general shift away from the high street. And the comforting factor here is that new-build has been dormant for so long that a fall in demand could see a continued supply/demand imbalance holding up values. On the hotel front, investment may suffer, but this is likely to be a short-term affair, because after the dust has settled, the UK will be a more attractive destination because of sterling's weakness.
Shares in housebuilders have been hit hard, but the initial overreaction has at least started to unwind. Shares in London-focused builder Berkeley Group (BKG), for example, started the day down 40 per cent, but a few hours later were down 'only' 20 per cent. It's hard to see the rationale behind the drop. Inward investment from the EU accounts for around 10 per cent of the total from all overseas buyers. Some cooling off is inevitable, but the underlying pillars of support are likely to limit this. Demand continues to outstrip supply by a country mile both in London and elsewhere. In addition, mortgage costs are the lowest on record, while it will be only a matter of time for overseas buyers to realise that buying UK property just became 10 per cent cheaper overnight.
Sectors least affected are likely to include companies such as Primary Health Properties (PHP) and MedicX Fund (MXF), which specialise in funding purpose-built medical centres. The other sector likely to be less affected is student accommodation, where overseas student numbers still look set to rise, helping the likes of Empiric Student Property (ESP), Watkin Jones (WJG) and Unite (UTG).
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