One of the most common questions we have been asked over the past year is ‘how is Brexit uncertainty affecting the market?’ Generally, the expected answer is one of falling prices and slowing transactional volumes. While this is true in some parts of the UK, it is by no means the whole story. This, in turn, raises the questions why some parts of the real estate market are proving more resilient in the face of waves of uncertainty than others, and what will happen when that uncertainty diminishes?

Perhaps the first question we should be asking is whether businesses and consumers are actually significantly more uncertain than usual. The received wisdom is that this must be the case. Measures of business uncertainty such as the CBI’s Business Optimism Indicator have not only been more volatile since 2016, but have also indicated a lower level of confidence. However, the story on the consumer side of the economy is more nuanced, with the GfK Consumer Confidence Index pointing to significant negativity about the prospects for the UK economy, but relative stability – and indeed optimism – when people are questioned about the outlook for their own financial situation.

The impact of Brexit

The logical extrapolation of these trends would lead you to believe that if businesses are worried, then surely they will not be leasing more premises or buying more land.

However, 2016 to 2019 has blown even these simple assumptions out of the water, with record levels of office leasing activity, better than expected levels of housing turnover, and weak agricultural land turnover. Maybe the real impact of Brexit has been on sentiment-based decisions (those that do not need to be actioned), while needs-based decisions still have to be made, even during a sustained period of uncertainty.

One of the reasons some investors are so interested in uncertainty is that they see it as an opportunity. However, aside from the period immediately after the referendum in 2016, there have been relatively few real estate bargains to be had in the UK (unless you can take advantage of the weakness of sterling). The low cost of finance has made refinancing of debt relatively cheap and easy, and, apart from the retail sector, there has been remarkably little distress in the property market over the past few years.

Prospects of a bounce

Another reason behind the obsession with uncertainty is the hope that, when it diminishes, the market will heave a sigh of relief and bounce back in terms of prices and transactional volumes. While there are undoubtedly some quite significant groups of investors who have been less active in the UK than usual since 2016, we do not expect that the ‘Brelief bounce’ will be as significant as some people are hoping.

The first reason for this relative caution in our outlook is that it is difficult to have a strong bounce when many markets are functioning at normal, or indeed better than normal, levels.

The second reason is that, where prices have fallen substantially, there are more factors at play than just uncertainty. For example, while retail property has undoubtedly been affected by uncertainty over Brexit, the more significant driver of falling prices and transactional volumes has been the structural challenges around online and omni-channel retailing.

Future challenges

Similarly, in the mainstream residential property market, the weakest performing areas have been where affordability has been stretched to its limits, and economics are expected to continue to drag on the market going forward, regardless of an end to Brexit-related uncertainty.

The final reason why we do not expect UK real estate to see a strong rebound in activity or pricing in 2020 is the fact that, whatever happens on 31 January, it will not dramatically diminish uncertainty over our relationship with the EU. Whether we leave and enter the maelstrom of WTO regulations, or enter a period of negotiation with the EU over everything from agricultural tariffs to zoo breeding programmes, the simple fact is that uncertainty will not disappear. This, above all the other reasons listed above, will limit the upside for 2020 and beyond, both in terms of pricing and transactional activity.

The return to the market of those buyers who have stayed away may well put upward pressure on prices where there are limited sellers, but when Brexit slides into the history books, we will still have to deal with a wide variety of old and new structural, economic and legislative challenges.

All of these trends and disruptors present opportunities for investors in real estate, and we examine these in more detail in the remainder of this report.

_{Read the articles within UK Cross Sector Outlook below.}