As the latest UK house building figures show a rise, reports also show that year-on-year UK commercial property values, both invested and owner-occupied, fell by £43 billion between 2015 and 2016, a dip of 4.6 per cent.
According to the latest figures from the House Price Index, average house prices in the UK have increased by 6.2% in the year to January 2017 (up from 5.7% in the year to December 2016), continuing the strong growth seen since the end of 2013. In stark contrast, Figures from the IPF show that year-on-year UK commercial property values, both invested and owner-occupied, fell by £43 billion between 2015 and 2016, a dip of 4.6 per cent.
Stockport’s UK Commercial Property specialists Fairhurst Estates explains what impact the Brexit rollercoaster ride is having on the commercial property market:
No one ever expected the post-Brexit economic rollercoaster to be a smooth or easy ride. Following the initial cautious ‘wait and see’ approach we were all urged to take in the immediate aftermath of the leave vote, just over a year on we are starting to see some more definite patterns emerging.
For the commercial property market, the trend at present is downwards.
Obviously the biggest immediate impact this has is on investors, who are seeing the value of their holdings fall. Commercial property investment remains dominated by overseas investors, who make up 28.8 per cent of the market, the majority of which is centred around London. Domestic collective investment schemes (16.2 per cent) and REITs and listed property companies (15.2 per cent) are the next two biggest groups.
Falling values tend to signal a drop off in investment activity itself as the whole market becomes stagnant. This may already have crept through to impact on the construction industry. The Royal Institution of Chartered Surveyors’ (RICS) Q2 survey showed a deceleration in output growth of 6 per cent following positive results in Q1.
Workloads in commercial construction saw a much sharper dip than in residential. The signs are that developers are scaling back on plans amid wider economic uncertainty, with the finger being pointed squarely at Brexit for spooking investors.
A third piece of bad news in the space of a week came from the latest quarterly RICS commercial property survey. The Q2 figures show rental demand for commercial properties fell to a five-year low between April and June. Perhaps not coincidentally, the overall economy showed its weakest growth in five years, too.
So it is pretty fair to say that the UK commercial property market is being shot at from all sides at the moment – values are down, investment in development is down, rental demand is down. Unsurprisingly, two thirds of respondents told the RICS that they believed we were in the early stages of a downturn.
So where next? Although the finger of blame is routinely waved in the direction of Brexit and the political uncertainty surrounding it, there are other risk factors to watch out for. Inflation is creeping up, now 0.9 per cent above the Bank of England’s stated target of 2 per cent. Not only will rising inflation push landlords towards increasing rents when reviews come around, not great if tenant demand is falling already, it will also trigger what now looks to be an inevitable hike in interest rates sooner rather than later.
The UK economy has been insulated by historically low interest rates for the best part of a decade. When the increase comes, the concern is that capitalisation rates in property will fall, further driving down values.
Expert Opinion contributed by Fairhurst Estates Limited