by Emma Murray ( linkedin post)
The UK’s decision to leave the European Union following the referendum has not surprisingly resulted in a period of uncertainty and hesitancy. While the appointment of a new Prime Minister is, the first step on the road to clarity the direction of travel is only likely to become clear after many months. Even then, a further period of uncertainty will result as discussions with the European Community continue on the exact terms of the UK’s exit from the EU.
There seems to be a consensus locally that the ideal result would be continued access to the free market but with controlled migration. Such a position is however diametrically opposed to the beliefs of the remaining EU members and some hard negotiation and compromises will therefore be required to find an acceptable solution.
The uncertainty in the UK is likely to cause a reduction in GDP with forecasts now varying between 1% and 2% per annum growth this year and next (Source: Bloomberg). The significant devaluation in sterling will act as a boost to the export markets but will be painful for those goods imported resulting in inflation pressures over time. In the near term however there is likely to be more monetary policy easing through a combination of interest rate cuts, additional quantitative easing and potentially lower corporate taxes which will help drive economic activity. In time, and assuming a satisfactory trade deal with the EU, our biggest export market, it is expected to lead to a more buoyant less regulated market, and this will ultimately lead to a tightening of economic policy and improvements in sterling. However this is all some way off and there will no doubt be many twists and turns on the way.
The Brexit vote and the uncertain outlook has taken its toll on parts of the market with banks, financial services groups, house builders and REITS all being penalised through their share prices. The real estate markets were already slowing prior to the vote as investors considered the relative yield levels and the prospects for future rental growth. As a result, transaction volumes for the year were already well down on the levels seen previously.
In the private unlisted funds world the general nervousness has manifested itself in those property funds aimed primarily at retail investors which offer daily liquidity. Today we estimate that they represent around 5-10% of the total UK market by value. In an effort to get ahead of possible valuation weaknesses, many of the investors in these funds have submitted redemption notices. Learning their lessons from the last financial crisis and in order to treat all customers fairly, managers have when confronted with sizeable redemptions instituted a gating mechanism and moved to weekly fund valuations to ensure that departing investors are not overly compensated when values are falling. While the papers have tried to make much of these actions, by implying a further financial crisis, it is actually sound management in dealing with the issues of offering daily liquidity with a relatively illiquid asset class.
The immediate hysteria surrounding these funds will pass, indeed Aberdeen announced yesterday that their fund has now reopened although departing investors are likely to see value reductions of around 17% as a disincentive to withdraw.