The threat of a 'Brexit' – which would see the UK leave the EU – is one of the key risks that could affect UK real estate returns this year, said Aviva Investors, the investment arm of UK insurer Aviva.
The impending vote on UK membership to the EU could see unusually high currency volatility, higher gilt yields, capital flight, weaker economic growth and another Scottish referendum.
“All of this could drain liquidity and damage investment performance of UK real estate in the short-term,” said Richard Levis, global real estate analyst at Aviva Investors.
However, Levis doubts the likelihood of a Brexit and believes that even in the event the UK was to leave the EU, long term returns would be less volatile as he expects that the UK would retain close economic and political ties with the EU.
Another risk to real estate returns in 2016, according to Levis, is the impact a Eurozone debt crisis.
“The fragile political situation in Greece could provoke a re-run of the 2011/12 debt crisis and renewed fears that the Euro project could be derailed. The impact on UK real estate would vary according to how a subsequent crisis was to unfold, but the economic outlook would weaken, and confidence in the market would fall,” he said.
Less of a risk to property returns is increasing interest rates in the UK. Levis expects that UK interest rates will remain extremely low in 2016 and rise at a gentle pace. Yet, “unexpectedly rapid policy tightening would savage real estate returns if property yields also rose rapidly,” he adds.
On a more positive note, Levis foresees stronger rental growth and more overseas investment.
“There is a possibility rents will surge on restrained supply, low vacancy rates, a lack of new development and steady economic expansion,” he said. “The biggest upside potential is in the industrial sector.”
“We can also envisage an upside scenario where overseas net-investment continues to rise,” he notes. It is assumed that there will be an increase in demand for lower quality secondary assets and this would attract investment on non-core real estate assets such as infrastructure, residential, healthcare, care homes and leisure.