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Volatile markets since the UK voted to leave the European Union are clouding prospects for the nation’s real estate sector with commercial sectors most likely to be affected, according to a new analysis. Commercial real estate companies, especially those most exposed to London's financial districts, could be most affected by falling valuations and rents, followed by home builders in the higher end segment, says the report from S&P Global Ratings. ‘We anticipate the drop in valuation will be on average less dramatic for residential real estate assets than for the commercial sector, although it will vary between segments and geographies, the report says. ‘High end and luxury apartments in central London were already experiencing some negative trends in the past few months. We would expect this situation to continue given that this segment relies more heavily on foreign investors, which we expect may be even more hesitant buyers now, despite the fall in sterling,’ it points out. ‘On the other hand, we believe that value fluctuation in the mid-range and affordable segments will likely be more limited, especially given the structural undersupply of housing in the UK and the expected lower for longer interest rate environment. Any long term impact on migration flux as a result of a Brexit may nonetheless have some negative consequences on households' growth and ultimately on residential real estate overall. However, we view this risk as more remote for now,’ it explains. Home builders, the report says, could be more heavily affected by Brexit fallout than residential real estate investment companies. This is especially if demand for new homes starts falling should purchase decisions be delayed in the context of uncertainties created by the Brexit vote. ‘We understand that home builders are monitoring closely their weekly sales rates, footfall to showrooms, and mortgage approval rates, as key indicators of operating performance. These indicators seem to have remained relatively healthy so far, in particular in the affordable segment, and mortgage availability continues to be robust as opposed to the previous downturn in 2008/2009, the report says. ‘However, some deterioration cannot be ruled out, especially because the sector is strongly correlated to GDP growth, unemployment rates, and consumer confidence, which are all expected to be negatively affected in the coming months and years,’ it adds. The report also points out that home builders already observed some declines in sales rates in the second quarter of 2016, although this seems to have been related more to the change in stamp duty than concerns over Brexit, adding that a potential decline in house prices may also stretch margins for home builders. ‘While a drop in valuation of UK commercial assets of 10% to 20% or more would be detrimental to property companies, the robust fundamentals of the business model of real estate investment companies should limit any significant turbulence in operating performance, in our view, at least in the short to medium term,’ it points out. The climate could result in discounts being offered… Continue reading →