MSCI: UK real estate sector enters post-Brexit recession

MSCI based its verdict on a negative total return and capital value decline in UK property in July, as indicated in the IPD UK Monthly Property Index.

The total return in July fell to -2.4%, compared to 0.2% in June. Capital values depreciated by 2.8% during the month, the second consecutive monthly decline after a 0.3% fall in June.

'The July decline, coupled with the decline of 0.3% in June, indicates that the market is formally in recession post-Brexit referendum as weak investor sentiment hits yield pricing,' said MSCI vice president Colm Lauder.

July, the first full month after UK voters voted to leave the European Union, marked the biggist decline in total returns and capital values since the global financial crisis. The July capital value decrease is the greatest fall since March 2009, when the Index registered a capital value decline of 3.1%.

Capital value declines in July were particularly pronounced in the office sector in Central London, where values fall by 3.6%. Income return in the index remained broadly unchanged at 0.4%. However, market rental values switched to negative growth, albeit minor at -0.1% for the month of July, suggesting incomes may come under pressure in the medium term if further declines are recorded.

The fall in values during the month of July is the biggest such decline since the mid-point of the global financial crisis in March 2009, Lauder added. 'The UK market, especially in London, had been keenly priced in the run-up to the June 23 vote, with yields in the British capital city at historic lows and income returns amongst the least competitive in Europe. The record pricing in the real estate market could leave little room to buffer economic or political shocks, like Brexit, with values potentially falling further as occupier sentiment weakens.'

The IPD UK Monthly Property Index measures the performance of 3,341 property investments with a capital value of about £47 bn (€54 bn).