The commercial real estate market in the UK is unlikely to crash as a result of the country’s referendum on EU membership, according to Capital Economics.
Fears that yesterday’s public vote to leave the EU will trigger a correction “seem overly pessmistic”, the economic consultancy has argued.
But the result has “darkened the outlook for both the economy and the commercial property market, especially City offices, in the short term”, said property economists Ed Stansfield and Eduardo Gorab in a note.
Capital Economics has cut its forecasts for UK economic growth for this year and 2017 – down from 2.2% and 2.7%, respectively, to 1.5%.
Tenant failure and a rental correction are hard to envisage assuming that the UK avoids a recession – an outcome Capital Economics is forecasting.
Furthermore, the “real risk” to capital values lies with the potential for a spike in commercial property yields, Capital Economics said. But the result of the referendum “must have diminished the threat of a sharp rise in bond yields, with monetary policy now surely set to stay looser for longer”.
It continued: “And if we are right that the economy will slow, but not sink back into recession, any fears about the economy’s long-term prospects should recede pretty quickly, helping to underpin investor demand and capital values.
“Admittedly, our economic prognosis could be wrong, and even if we are right, office markets in central London and especially the City could be viewed as an exception.
“But given that it will take months if not years before we fully understand whether changes to the UK’s relationship with Europe will be marginal or substantial, we do not expect a knee-jerk response from investors or City occupiers.”
