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Brexit offers buying opportunity after temporary set-back

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・Since the Brexit vote in June 2016, the UK has gone from a macroeconomic outperformer to an underperformer due to the extended uncertainty on the final terms of the separation.

・ Due to positive household growth and good labor market flexibility, we expect the UK economy to outperform again in the next five years, making Brexit a temporary economic set-back.

・ The reason why the UK’s return to outperformance might come about slower than expected are twofold:

・ The potential for significant trade tariffs as the UK negotiates the final terms of moving outside the EU customs union.

・ UK consumer debt remains higher than in the Eurozone and has been growing faster recently. This leaves the UK more vulnerable to rate increases and normalization of bond yields.

・ However, UK real estate occupier markets have been resilient after the immediate shock and drop in fundamentals as evidenced by the significant recovery in 2017 in office take-up and net absorption. Rental growth also is projected to pick up despite a modest increase in vacancy rates.

・ UK investment volumes dropped by near 40% in 2016 but significantly recovered in 2017 amid platform deals and large lot-size deals by Asian investors. UK prime yields have gone sideways since 2016 and given other European prime yields have tightened further during the last two years, the UK now offers attractive yields compared to Europe.

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