Heartwood Investment Management, a £2.4 billion (€2.8 billion) asset manager, has been “gradually” reducing its exposure to UK property partly in response to Brexit – but says it is hunting for other real estate investments as prices become “compelling”.
The firm says it does not expect a UK property slowdown to the extent seen in 2007, despite half the funds in the UK’s property sector suspending dealing in the past week.
Charu Lahiri, investment manager at Heartwood IM, said the firm has been reducing UK property exposure throughout the year, not just in response to Brexit, but because the UK property cycle is now “maturing” since its post-2008 recovery.
“While we are facing a more uncertain environment in the near term, we do not believe this means that UK property is entering a protracted and deep slowdown such as we saw in 2007,” she said.
Investor sentiment had deteriorated in response to the UK construction outlook survey results in June, which were the weakest since 2009, said Lahiri.
Brexit may have accelerated the cycle further towards the “tipping point of a slowdown” and uncertainty may lead businesses into holding off investment decisions, affecting occupier and rental demand, and potentially causing a “double whammy” of both capital values and rental growth being hurt.
And she added that even though valuations were becoming compelling, hard evidence of transactional activity – which would help the market work out appropriate asset values – may not occur until political uncertainty subsides.
Yet there are also positive factors, said Lahiri, that distinguish today’s market from 2007. There are greater levels of cash in open-ended property funds; far lower leverage levels in funds; and better capitalisation of UK banks should reduce fears of contagion.
“In our view, it is still too early to assess the impact of Brexit on property prices, particularly as we have yet to see the impact on transaction activity following the referendum result. The market is trying to evaluate a fair price but until we see actual property deals being done, nothing is certain.”
Last Friday, the Financial Conduct Authority issued guidance to fund managers in light of high levels of redemptions and the trading suspensions.
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