Analysts at financial services giant UBS believe that business premises in London could lose 20% of their value following the UK’s decision to leave the EU. This is 5% more than initially predicted, so should landlords be bracing themselves for declining revenues?
Falling prices and market uncertainty, UBS predicts
UBS previously estimated that commercial property prices in the capital would fall by 15%, but the uncertainty that Brexit has triggered has forced the financial company's analysts to revise their forecast. UBS also stated that some 'Brexit clauses' added ahead of the referendum have now been activated, allowing commercial property investors to pull out of transactions.
Though the price decline is expected to be significant, it’s highly unlikely to be as large as the 44% fall recorded in the wake of the bankruptcy of Lehman Brothers in 2008. Osmaan Malik, UBS’s Head of European Property Equity Research, said that while the long-term picture is “uncertain”, there are some factors “that should mitigate the impact”. For example, the drop in sterling has made the market around 10-13% cheaper for overseas buyers, which may persuade them to continue investing in UK property.
‘Fire sales’ – the inevitable result?
There is a fear that commercial property funds will react to the uncertainty by initiating so-called fire sales, where shopping precincts or offices are sold quickly to keep customers, who naturally wish to profit from their investments, happy. The Financial Conduct Authority has warned investment vehicles to avoid fire sales and reminded them of their duty to treat their clients fairly.
Mike Prew, Equity Analyst at global investment bank Jefferies, believes that as much as £5 billion of commercial property could be sold in order to repay concerned investors. However, other experts have cast doubt on whether lower prices will actually result in increased sales. There may well be further knock-on effects as a result of the UK’s impending exit from the EU; landlords may be concerned that commercial rent arrears could become more common if the market slows down. In the meantime, commercial property owners are best advised to secure their rental returns until the picture becomes clearer.