There was something predictably inevitable about the way that companies grouped together under the commercial property banner were tarred with the same brush in the wake of the referendum; inevitable, but somewhat crude given that the commercial property market is a pretty broad church.
For investors looking to pick through the wreckage in search of a bargain, it has to be said that the rewards are considerable, but the risk profile has increased, too. It’s all too easy to make suppositions based on the idea that one thing must inevitably lead to another. A typical example comes with the risk of financial services losing the passport that allows them to operate across the whole EU. Losing that may or may not happen, but valuations are being based on the worst-case scenario, which in itself might be a healthy or at least a sensible approach. The list of bear factors continues to include rising unemployment, falling GDP growth, a recession, increased void rates and downward pressure on rents. Yes, we’re all going to hell in a hand cart – again, so it would seem.
The question now is whether this doom-laden scenario will be acted out. There is certainly a risk that the detrimental effects of the leave vote will create a vicious circle of uncertainty, where we run the risk of simply talking ourselves into a recession. For example, some valuations have already been cut, but basing valuations on sentiment is hardly scientific and potentially misleading since the referendum there simply has not been an adequate quantity of commercial property transactions upon which to base valuations. The downside outlook adds considerable weight to the bearish view, but we have yet to see how the UK government will react. And act it almost certainly will. We have already had a few appetisers such as lower interest rates for longer, a mooted cut in corporation tax and a relaxation in banks’ reserve requirements, and there might be more to come.