UK fund managers warned not to 'talk' themselves into correction

The Investment Property Forum (IPF) has revealed how real estate fund managers across the board have revised down their short-term expectations for the market.

Regular contributors to the regular consensus forecast – including the likes of CBRE Global Investors, AXA Investment Managers, M&G Real Estate and Legal & General – have universally cut their forecasts as a direct result of the UK vote to leave the European Union.

All 23 parties who gave their views on the whole of the UK market, said their expectations for rental growth and capital value growth were lower than they were prior to the referendum on June 23. In May, the IPF admitted it was difficult to gauge sentiment in the run-up to the vote.

“A correction in prices is perfectly rational”, said one respondent. “Weaker growth, even if still positive, suggests rising yields,” said another.

Separately, Capital Economics, which has been more bullish on the UK than some commentators, warned of the risk of market “talking itself into a correction”.

“Our central view is that the outlook for commercial property is healthier than the recent gloomy headlines would suggest,” the company said in a note.

“Nevertheless, there is a latent risk that negative sentiment itself could become self-fulfilling. If this is the case, then a flurry of fire sales or wholesale devaluation of assets, could throw our forecasts off course.”

LaSalle Investment Management has already said the negative effect of Brexit is likely to be short-lived and less severe than some have been fearing.

Pam Craddock, IPF research director, also pointed out that some of the IPF contributors are “forecasting a better outcome than their pre-Brexit figures in certain sectors within the next three to five years”.

The longer the time horizon, the less consensus there is among investors, the survey found. Brexit has not affected the majority of managers’ long-term expectations (73% for rental growth and 68% for capital growth).

Speaking separately to IPE Real Estate, James Lass, fund manager at Schroders, said the market had already seen deals take place at 10% discounts.

But he said such cases were limited to investors that needed to sell in a matter of days. Other investors, not under pressure to sell, could achieve better pricing.

Lass, fund manager for the £2.2bn Schroder UK Real Estate Fund (SREF), said there was now a “two-speed market” in the UK.

A number of open-ended property funds have been compelled to sell assets in the face of redemptions from investors – most notably, Aberdeen Asset Management’s sale of a prime London West End asset for £124m to the Norway’s sovereign wealth fund.

There is a fear that an increase in forced sales could bring capital values down more widely, but there are signs – including the reduction in the redemption charge in Aberdeen’s fund – that the situation regarding the UK’s open-ended funds could be stabilising.

Capital Economics said: “Assuming that we are right about the economy, and that a fire sale is looking unlikely, the biggest risk to capital values seems to be the perception that values would suffer in response to Brexit.”