UK real estate outlook: Risks and opportunities emerge after Brexit

August 2016

We expect the ‘Brexit’ vote to have a lasting impact on the UK real estate market. We have downgraded our forecasts for total returns on domestic property from 5.1 per cent per annum to 4.3 per cent over the next five years.


The UK’s vote to leave the European Union on June 23 has cast a shadow over the British real estate sector. The ‘Brexit’ result had a severe immediate impact – and the long-term outlook for UK property has profoundly changed.

Transaction volumes had already slowed in the lead up to the vote – the second-quarter total of £11.2 billion was the lowest recorded in three years[1] – largely due to growing concerns over the outcome of the referendum.

The market has stabilised somewhat, but uncertainty persists despite the decisive ‘Leave’ vote. Prime Minister Theresa May has not confirmed when her government will trigger Article 50 of the Lisbon Treaty, signalling the beginning of negotiations over Brexit. The precise nature of the UK’s future relationship with the EU remains in doubt.

Brexit blues?

Take the City of London. It is unclear whether UK-based banks will be able to retain the so-called passporting rights that enable them to provide services such as the clearing of euro-denominated securities. If those rights are revoked, larger banks may move staff elsewhere, leading to a big drop in demand for central London office space.

Beyond the financial sector, we expect the Brexit vote to hit many retailers, particularly those struggling to compete with discount and e-commerce operators. We believe the UK will slip into a mild recession before the end of the year, which will affect consumer confidence. This would hurt these companies’ revenues just as the fall in the value of the pound makes imports more expensive, increasing their costs. As a result, lower-quality shopping centres and retail parks in peripheral regions of the UK may struggle with low occupancy rates over the second half of 2016.

As a result of the combination of lower capital-market liquidity, heightened risk aversion and a weaker occupier demand outlook, we have downgraded our return expectations for real estate. We now expect all-property total returns of 4.3 per cent per annum over the 2016-2020 period, down from 5.1 per cent previously.

Window of opportunity

Nevertheless, the impact of Brexit on UK real estate should not be overstated. There are signs the sector was already on the brink of a cyclical decline even before June 23 (see chart). After seven years of growth, the market was entering a ‘cooling-off’ period as yields reached record lows and rental growth began to slow.

Important Information

Unless stated otherwise, any sources and opinions expressed are those of Aviva Investors Global Services Limited (Aviva Investors) as at 12th August 2016. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Past performance is not a guide to future returns. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.

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