The prime and London property markets could be left reeling from a downgrade by the major ratings agencies.
Both Moody’s and Standard & Poor have warned the UK’s exit from the EU could lead to a downgrade of the government credit rating.
This in turn could lead to higher yields on UK government bonds, which will put at risk the sustainability of property prices around the UK, and especially in London, where yields have fallen to well under 4%.
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Colm Lauder, executive director at MSCI, said that the double whammy of a bond yields rising and falling rents, due to lower occupier demand, could be a double-edged sword for commercial property.
“If you an overseas owner of UK debt, are you going to buy UK government bonds? This will mean a repricing coming into bonds, which will mean re-pricing in property too.
“The reason London could sustain such rich prices was the low yields of bonds: that could push down property values.”
Others were more positive about the long-term effects.
Jackie Bowie, CEO at JCRA, said that a sovereign credit downgrade would not automatically lead to materially higher bond yields.
“To be honest, while I am not saying credit rating is not important, I wonder if investors might look at that in the short term. It may not have as big an impact on bond yields as in a ‘normal environment’, because everyone is still in very much “risk off” mode.
“You would expect higher rates, but I am just not sure you will get that clear direct linkage with the ongoing flight to safety.”
Miles Gibson, head of UK Research at CBRE, said: “Any increase in property yields may be temporary, because the inherent attractiveness of the UK market, including its transparency, political stability and market liquidity, will provide long term support for prices.
“Property rents, yields and prices are also likely to be supported by a delay in office development activity in the wake of the vote, and a decline in the value of the sterling could be a catalyst for increased foreign investment in the UK.”
Alex.peace@estatesgazette.com or @EGAlexPeace or @EstatesGazette
