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MSCI: UK property market 'is formally in recession'

The New York-based research firm’s UK monthly property index confirms two consecutive months of depreciation in the commercial real estate sector following Brexit.

UK commercial real estate values decreased by 2.8 percent last month, according to New York-based research firm MSCI’s UK Monthly Property Index.

The monthly depreciation in July follows a 0.3 percent fall in the sector’s values in June. The biggest losses were in central London office buildings, where values fell 3.6 percent.

The UK real estate sector was among the first to feel the impact of the EU referendum result. Asset managers suspended trading in their UK open-ended property funds due to panicked investors rushing to take their money out, while shares in major property firms sank.

July, the first full month after the referendum, marked a major decline in capital values since the global financial crisis. Last month’s fall in values was the greatest drop since March 2009, when MSCI’s index registered a capital value decline of 3.1 percent.

“The July decline, coupled with the decline of 0.3 percent in June, indicates that the market is formally in recession post-Brexit referendum as weak investor sentiment hits yield pricing,” said Colm Lauder, vice president at MSCI.

“The UK market, especially in London, had been keenly priced in the run up to last month’s vote, with yields in the British capital city at historic lows and income returns amongst the least competitive in Europe,” Lauder added. “The record pricing in the real estate market could leave little room to buffer economic or political shocks, like Brexit, with values potentially falling further as occupier sentiment weakens.“

While property values fell dramatically after the referendum, rents remained relatively stable, said Lauder. He added that during downturns, real estate values typically fall well before rents. For example, in 2008 property values fell for almost a year before rental values were affected.

The index, which is used as a benchmark of real estate performance, measures the performance of 3,341 property investments in the UK with a capital value of about £47 billion.