Fluctuations in the real estate market caused by the UK’s vote to leave the European Union are likely to be shorter-lived and less severe than many investors fear, according to LaSalle Investment Management.
The firm’s mid-year Investment Strategy Annual found that a correction in real estate pricing is expected to be largely restricted to the next 18 months.
Medium-term capital inflows into real estate will only be interrupted, not reversed, LaSalle said.
It also suggests that, given ultra-low interest rates and bond yields, UK real estate yields are only expected to increase by 40bps to 50bps points by the end of next year.
Mahdi Mokrane, head of research and strategy for Europe at LaSalle, said the UK, and a “dynamic London, home to one of the world’s most liquid, transparent, and investor-friendly real estate markets”, is likely to reinvent itself outside of the EU.
Overall prospects for the UK outside the EU could well be broadly more positive than what is implied by current market commentators, Mokrane said.
“We expect the forecast correction in real estate pricing to be largely restricted to 2016 and next year and medium-term capital inflows into real estate will only be interrupted rather than reversed.”
Elsewhere in Europe, headwinds facing London’s financial markets should help support the real estate market in cities such as Frankfurt, Paris, Dublin, and to a lesser extent Amsterdam and Madrid. LaSalle said that before the impact of Brexit, office demand across Europe was already undergoing a strong renaissance in cities with strong trends in demographics, technology and urbanisation.
Globally, LaSalle said a “lower for longer” interest-rate situation will boost core real estate returns in the short run, while dampening the long-run outlook for rental income growth.
Real estate values for stabilised assets in major markets outside the UK may continue to increase or hold steady, the firm predicts. The cyclical recovery in fundamentals will move much more slowly, LaSalle said. At the same time, cross-border and domestic capital sources in many countries could narrow their range of target investments to focus on these traditional, core themes.
Jacques Gordon, global head of research and strategy at LaSalle, said that, across the globe, fundamentals of supply and demand are well-balanced going into the second half of the year.
“Turmoil in capital markets might also open higher-yielding buying opportunities from distressed sellers as the implications of the Brexit vote in the UK ripple around the world,” he said.
“Although the UK has been the epicentre for political and financial tremors since 24 June, the law of unintended consequences suggests that investors should also closely watch for ripple effects in the EU, North America and even all the way to Asia-Pacific.”