Following the results of the referendum in Britain to exit the European Union, here are a few insights from a story published in the June issue of Institutional Real Estate Americas. As Dave Lowery, senior research analyst, real assets, with AXA Investment Managers, noted in “What next?”:
“Brexit is likely to lead to an extended period of uncertainty, most probably proceeding through three phases after a decision to leave: (1) uncertainty during the negotiation period with the European Union; (2) transition as the United Kingdom implements new trade agreements; and (3) steady state — performance after all replacement agreements are in place. The first two phases likely would have a detrimental impact on activity and, according to AXA IM forecasts, could reduce U.K. GDP by between 2 percent and 6 percent in total over the next 15 years. In the event of Brexit, it is probable the Bank of England could cut interest rates toward zero and embark on further quantitative easing, in an attempt to boost the economy through the inevitable periods of uncertainty and adjustment. Given the United Kingdom is not a member of the euro area — potentially making an exit easier than for members of the single currency — sterling is likely to weaken further.”
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“Given current uncertainty and the weakening economy, investors should hold low-risk assets, such as core and long-lease, during a potential repricing phase, as alternatives are limited. These assets can be shielded somewhat through the repricing phase by embarking on low-capital-expenditure asset-management initiatives. If there is a vote for Brexit, the likely intervention by the Bank of England could keep gilt yields low, supporting real estate investment through a wider yield differential between the two asset classes. Furthermore, long-term foreign investors could benefit from a weaker sterling and secure quality assets at more favorable levels.”
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“Ongoing, late-cycle, value-add strategies targeting office properties should be completed, as Brexit uncertainty is not a reason to halt or abandon current projects. Assuming no Brexit, future value-add projects can be assessed on a case-by-case basis, focusing on short-term and low capital-expenditure strategies, which are likely to work only in London, where rental value growth is strong, despite spreads being tighter than in previous years.”
Read Lowery’s full thoughts here.
The views, statements and opinions expressed in this article are those of the author and are not necessarily those of Institutional Real Estate, Inc.
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Loretta Clodfelter is editor of Institutional Real Estate Americas.
