The property market has been one of the biggest casualties of Brexit since the referendum vote in 2016. The sector was immediately thrown into turmoil amid fears that Britain’s departure from the EU would see property prices plunge.
Three years on from the vote and less than three months until the Brexit deadline, the outlook still doesn’t look optimistic. Investors are particularly concerned about the effect on London property, with many fearing that the City could become a ghost town of vacant office space if companies move their operations elsewhere. Worried investors pulled £425 million out of property funds in June alone, according to investment Association figures.
Such negative sentiment has weighed on performance – the average property fund is up just 1.1% over the past year. “The performance for the property sector has been lacklustre this year,” says Nathan Sweeney, senior investment manager at Architas. “And this is driven indeed by the possibility of a hard Brexit.”
Areas of Opportunity
But despite the numerous challenges facing the sector, there are still areas of opportunity. Warehouse and logistics properties have flourished in recent years as the rise of e-commerce means firms need more space to store their products and from which to ship them.
Tritax Big Box, a real estate investment trust, has been a major beneficiary of this trend. The trust owns 58 properties across the UK, typically modern buildings in prime locations with good transport links. Colin Godfrey, manager of the trust, says demand for these units is outstripping supply, even despite Brexit uncertainty, and that’s helping to push up rents. Planning regulations limit the number of larger logistics sites that can be built, which should help that trend to continue. The trust’s net asset value has produced an annualised return of 13.4% over five years.
Miranda Cockburn, real estate analyst at Panmure Gordon says: “We believe that sub-sectors such as logistics, student accommodation, GP surgeries and residential focused REITs will prove more resilient as will more operational sectors such as self-storage.”
Yet, while e-commerce is thriving, the retail sector has struggled as shoppers abandon the high street in favour of online shopping. This situation could worsen post-Brexit, warns Sweeney: “A ‘no deal scenario’ will see inflation rise, pushing up the cost of goods.”
Supermarket Sweet Spot
But Ben Green, investment adviser at Supermarket Income REIT, insists that supermarkets should buck the trend. He thinks this part of the market has defensive qualities, because shoppers will always need to buy groceries regardless of the economy or Brexit.
“Unlike high street retail, where up to 30% of sales are now online, online grocery penetration is only 8%, of which more than 70% is fulfilled from physical supermarkets, which we call omni-channel stores,” he says. But the supermarket sector is not without its issues; this month Tesco announced 4,500 job cuts across 153 of its Metro stores amid cost pressures and lower footfall.
Still, the positive backdrop has pushed the trust to a 13.9% premium. One of the main attractions to property investments, of course, is the income they can pay and Supermarket Income REIT yields 5.4%.
It was not so long ago, however, that many property trusts fell to significant discounts. As share prices plunged after the EU referendum, Sweeney used the opportunity to invest in the Kames Property Income and L&G UK Property funds – two of the open-ended property funds which did not suspend trading after the referendum.
“We used general concerns about property as an opportunity to buy”, he says. He likes these funds because they have less exposure to London and the south east, which are generally expected to feel the effects of Brexit more heavily. As with many open-ended property funds, the main drawback is they hold a high level of cash, which can drag on returns – 28.7% and 18.6% respectively.
Sweeney also likes the Ediston Property Investment Company, which has just 8% of its assets in cash: “It invests in UK commercial property and has a good reputation for buying properties at competitive valuations in areas overlooked by others in the market."
