Downside risk to UK property highlighted

Fund manager Aviva Investors says the outlook for UK real estate is generally positive, but there are downside risks to consider for investors.

The manager expects returns to be in line with historical norms, although lower than in 2015, with healthy occupier demand and a broad recovery in rental markets. Aviva Investors global real estate analyst, Richard Levis, commented: “We expect healthy occupier demand and a broader recovery in the rental market to drive capital appreciation in coming months. Good quality, higher-yielding assets are likely to do especially well this year, but there are multiple risk factors that could have both negative and positive implications for the market.”

Levis pointed out a number of potential risks for UK property markets, starting with the possibility that the electorate will vote to leave the European Union in a referendum. “We doubt the UK electorate will vote to leave the EU this year. However, short of a decisive mandate to remain in the EU, the aftermath of the vote 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.” Levis added that the central London office market would be most at risk from “Brexit”, particularly the City due to a possibly lower demand from the financial services industry.

Other risks include the Greek debt crisis recurring and an unexpected rise in interest rates. The latter would increase yields and hit property values. Levis said he expected overseas investment demand to fall due to slowing emerging markets, low oil prices and rising geopolitical tensions. But if overseas demand remains strong, he said investors could be forced into more non-core property assets, such as infrastructure, residential, healthcare, care homes and leisure.