Viewpoint - 20/05/2015

Market Overview, May 2015: Election result spells fresh round of political uncertainty

The market recently enjoyed a collective sigh of relief following the clean-cut election result and the aversion of another hung parliament. With this round of political uncertainty resolved, at least until the promised EU referendum, positive momentum in the market is set to continue during 2015.

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No sign of pre-election slowdown

Investors were undeterred in the months leading up to the election. UK investment volumes reached £19.1bn in Q1, the third highest quarterly total on record. While commercial property returns moderated, down from 4.1% in Q4 2014 to 2.9% in Q1 2015, this was widely expected, as the yield compression seen in 2014 starts to ease down from unsustainable levels, set against continuing rental growth.

Meanwhile, official figures on the UK economy were relatively disappointing, with the preliminary estimate of 0.3% growth in Q1 at just half of the previous quarter’s 0.6%. However, it is debatable whether this result really stemmed from pre-election jitters. Indeed, the figure contrasted with the relatively upbeat survey data from the time, suggesting that the figure will be revised upwards in due course. 

But plenty more political uncertainty lies ahead

The business world reacted in expectedly bullish fashion to the election result, reflecting the collective relief around both the certainty of the outcome and the victorious political party. The day after the election, the FTSE 100 closed 2.3% higher and the pound rose 1.4% against the dollar, reflecting investors’ renewed confidence on the back of a Conservative government. 

But plenty more political uncertainty lies ahead. Firstly, the surge in support for the SNP has renewed fears about the future of Scottish independence coming back onto the agenda. Then, ironically, the Tory’s majority victory brings another, arguably more serious, dose of uncertainty in the medium term, given their pledge to hold a referendum on the UK’s membership of the EU. As a minimum, the markets will benefit from clarity on the timing around a referendum as soon as possible, which as it stands could come at any time between early 2016 and the end of 2017.

Still much to be positive about

It is all too easy to obsess about the near-term, political risks to the economy and property markets. But it is important to remember the positive circumstances which arguably put the Conservatives into power in the first place - the strong economic recovery the UK has seen during the latter part of the previous parliament. 

Despite genuine concern over how the future will play out politically, this continues to be more than offset by other, positive fundamentals in the commercial property markets, at least for the time-being. The occupier markets are benefitting from positive growth in employment, real wages and elevated consumer confidence, all of which ultimately bodes well for rental growth. Given that interest rates show little sign of moving upwards over the next 12 months, the case for investment into property remains relatively sound.

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