The threat of Brexit has rather crippled the UK commercial property market in recent years.

With little clarity as to how Brexit will impact the UK economy, many property investors have avoided the asset class and this has had a detrimental impact on property values in some areas of the market.

However, according to a recent article in Morningstar, a number of UK real estate investment trust managers believe that once Brexit uncertainty clears, the UK commercial property sector could be set for a rebound.

According to these portfolio managers, there is a substantial amount of cash sitting on the sidelines right now as a result of Brexit uncertainty.

Once the outcome of Brexit is known, both domestic and international property investors will plunge back into the market.

“Once there is some clarity, there will be a period where people will just digest what is happening, formulate a strategy and then look to implement that strategy,” said Calum Bruce, manager of the Ediston Property Investment Company.

Simon Marriott, investment director at London & Scottish Investments was even more positive in his assessment of the outlook for UK commercial property, stating: “I’m a believer that when there is some certainty, anything other than no-deal, prices are going to get stronger.”

Is this bullishness valid? Let’s take a closer look at the dynamics of the UK commercial property market.

Brexit uncertainty and UK commercial property

In the short term, as the UK prepares to leave the European Union, it’s likely that uncertainty will continue to prevail.

Without confidence in the economy, companies’ growth plans may potentially be put on standby, and this could result in a fall in demand for commercial property, impacting property values negatively.

Adding complexity here is the fact that there is still no clarity as to what Brexit actually looks like.

A no-deal Brexit could certainly have a detrimental impact on the UK property market.

The threat of this outcome terrifies the market and a ‘no-deal’ Brexit could wreck a recovery.

According to Capital Economics, under a no-deal Brexit UK commercial property values could fall by 5% to 9% over two years.

In general, given the uncertainty that Brexit has created, the consensus among property experts is that UK commercial property values will weaken in 2019 to a degree.

Structural growth drivers

However, looking past the short-term Brexit uncertainty, there are a number of structural growth drivers that could benefit the UK commercial real estate market in the medium to long term.

There are certainly sectors of the market that look well positioned for future growth due to favourable supply and demand dynamics.

One such sector that appears to have attractive growth prospects at present is urban logistics.

This sector sits at the top of Savills’ 2019 UK property trends forecast table, and is expected to generate annualised returns of 10% over the next five years.

Over the last decade, demand for warehouse space has increased substantially on the back of changing consumer habits and the increased popularity of online shopping.

Indeed, according to CBRE’s 2018 Global Industrial & Logistics Prime Rents report, the e-commerce boom has doubled the demand for warehouse space in the UK over the last 10 years.

For every extra £1 billion of online retail sales in the UK, retailers need to find an additional 1.125 million square feet of distribution space yet supply is limited and build costs are high, meaning that there are attractive supply and demand dynamics at play.

As such, once Brexit uncertainty clears, this area of the property market could potentially generate very attractive returns.

Another area of the UK real estate market that is in high demand right now is flexible office space with demand being driven by the rapid increase in the number of startup companies across the UK.

Startups could kickstart recovery

Today, the UK is one of the most dynamic startup hubs in the world.

This is thanks to its abundance of highly-skilled workers and strong culture of entrepreneurship, which is creating a demand for modern co-working spaces designed specifically for early-stage companies.

With the UK’s startup scene likely to continue building momentum in the years ahead, demand for this type of property should remain robust, meaning real estate values could move higher once Brexit uncertainty subsides.

Overall, while Brexit uncertainty remains elevated, there appears to be a number of attractive opportunities within the UK commercial property market right now.

Once Brexit is resolved, there is a good chance that buyers will return to the market in order to take advantage of these opportunities.

But not if the fringe elements of the Conservative party get their way. A ‘no-deal’ Brexit would wreck all hopes of a UK commercial property market recovery.

Fingers crossed that sanity prevails.

Also read: How To Repurpose Empty Retail Space