An in-out referendum on the UK’s membership of the European Union held in June 2016 would minimise the potential impact on the commercial property market, says Savills.
The international real estate advisor says that a prospective referendum date in June 2016 – the probable timing if David Cameron’s current negotiations with other EU member states progress in the coming weeks – will minimise uncertainty in the market. The longer the lead-in time, Savills says, the more ambiguity amongst investors and the higher the likelihood that UK investment volumes will slow in the first half of 2016, although investment volumes for the year to date are currently only 10% lower than those in January 2015.
The impact of the referendum and a full exit from EU membership will be less keenly felt in the occupational market, according to Savills, as the attraction of the UK to occupiers will largely not be diminished, due to its location, time-zone, talent pool, access to capital, and legal system. Any effect in the occupational market is likely to be minimal and take several years to filter through.
Savills forecasts that total returns on UK commercial property are likely to cool to 8-9 per cent this year, compared to 20 per cent at their peak in October 2014, driven by a five-year period of lower capital value growth. The low point of the current market cycle is likely to be in 2017, when growth will remain flat, followed by higher returns in 2018-2019, driven by increased income returns, leading to five-year average returns of 7-8 per cent.
Mark Ridley, Savills CEO UK & Europe, comments: “We’ve already seen a number of short-term factors impact investors’ sentiment this year, however appetite for UK property remains healthy: Chinese investors remain active in the market and negative interest rates in Japan will also benefit global real estate. As we saw in the run up to the 2015 General Election, one of the biggest threats to the UK market can be prolonged uncertainty: a referendum in June – whatever the outcome – will therefore offer investors security and enable them to plan for the long-term. The more drawn out the process, the more likely that investment volumes will fall throughout the year.”