Long-term damage of Brexit 'less than expected' - report

The shock decision for the UK to leave the EU is unlikely to cause a significant decline in overall property investment activity in Europe but it could boost demand for its core region as investors try to avoid Eurosceptic markets, according to research house Capital Economics.

Capital Economics noted in a new report that the financial market response to the Brexit has been predictably negative, with initial steep falls in the pound and stock markets across Europe – although the markets have partially recovered since.

“The heightened sense of both political and economic uncertainty has seen core European bond yields fall further, presumably for safe-haven reasons, while peripheral yields have risen,” it said.

The vote to leave has weakened the near-term outlook for the UK economy but the firm believes that the long-term damage will be smaller than many estimates have suggested. Capital Economics, however, also foresees substantial negative effects on the European economy as a whole, as doubts are raised over the future of the EU and the single currency.

Referring specifically to the property sector, the Capital Economics researchers believe that as the investment market will be hit by a fall in business and investor confidence, transaction volumes may decline with investors targeting government bonds, the US dollar or even cash. Another effect could be a shift in focus from the UK, especially London, towards European cities. Capital Economics named Berlin, Frankfurt, Munich and Paris as likely prime targets. “Transaction volumes in core markets could also be boosted if investors shy away from peripheral markets and those seen as being more Eurosceptic, such as the Netherlands.”

Lingering uncertainty and slower economic growth will also damage occupier demand in both the office and industrial sectors. “Our GDP growth forecast of 1.2% this year for the Eurozone is already below the consensus, but we may now be too optimistic in our hopes for an acceleration in growth next year.”

The possible negative implications of the Brexit on the City of London means a potential upside for occupier demand in Frankfurt for the financial sector and Paris, Munich or Berlin for legal services and TMT. “While it is too early to know the extent of such shifts, the risks to our rental growth forecasts in these cities is to the upside.”

The full impact of the UK’s vote to leave the EU will take months, if not years, to play out, the firm noted. “Though we expect the immediate impact on European commercial property to be limited in the second half of the year, yields in core European cities could fall further than we previously expected, and with greater gains in capital values.”