On 23 June the UK surprised everyone by voting to leave the
European Union. Overnight, Sterling fell 10%, the FTSE fell below
6000 and David Cameron resigned as PM. Initial optimism that
businesses (and politics) could carry on as usual has given way to
a period of uncertainty and instability, very much proving the
phrase "a week is a long time in politics".
For the real estate industry, the most clear manifestation of
instability has been the initial rush for, and subsequent
suspension of, redemptions by seven of the UK's largest retail
property funds which between them hold £14 billion of real
estate assets. Two of those funds have gone further and
revalued their funds (downward) by up to 17%.
This would not appear, as it may at first seem, to be a
knee-jerk reaction by the funds, but is rather borne of experience
gained over the last recession: suspending redemptions allows
the funds to manage their liquidity needs better and re-valuations
incentivise investors to leave their money where it is rather than
taking it out at a discount. As the funds start to re-open we
will see how successful a policy this has been.
Whatever happens, the retail funds will need to replenish their
cash reserves: some commentators have suggested that as much as
£5 billion will need to be sold to do this. The need
for cash will depend on levels of cash reserves which will vary
considerably from fund to fund. High numbers of properties
coming to the market will invariably have a downward pressure on
pricing, so it will be for the funds to try to manage the process
to avoid a material pricing correction.
Some funds have put their largest trophy assets on the market in
an attempt to raise the required cash quickly, and by marketing
fully, use competitive tension to maintain pricing. Other
fund managers may look to "off market" deals to replenish
What is clear is that there is stock for sale and as head of
real estate at the accountants PwC, Craig Hughes, has commented
"There is a huge amount of capital waiting".
A Sterling Opportunity
The falling pound has delivered a foreign exchange discount to
investors who operate in hard currencies other than sterling:
investors operating in US dollars have seen a potential 10% saving
against sterling, although there has been some recovery in recent
Opportunistic overseas buyers with cash reserves who are able to
take advantage of the weak pound and move quickly, as well as long
term investors with cash reserves, may therefore be able to secure
deals at a discount to the pre-referendum cost.
However, whether investors see current pricing as attractive
will depend on their medium to long term view of the UK, and in
particular, the London real estate market. James Roberts,
Knight Frank's chief economist, has expressed confidence that
the UK's real estate market is resilient telling Forbes that by
the summer of 2017 "asset prices for the more robust property
sectors could be pushed back to where they were before the
Inevitably the key to this will be London: London's
property market showed itself to be resilient during the
rollercoaster recessionary period of 2008-2011. The rapid recovery
of central London's real estate market in 2009/10 provided a
real driver for opportunistic funds and purchasers to make higher
returns, but at that time London's position as a world
financial and business centre providing a bridge-head into Europe
was never in question.
Now London's position as an attractive market for real
estate investment is contingent on whether it will remain a key
player on the world stage post-Brexit. Much was said in the
run up to the referendum about the impact of a Leave vote on
London's economy and in particular concerns about banks and
financial institutions moving out of London.
The details of the UK's divorce from the EU are still
unknown but the strong rhetoric from those (still) in Government
suggests that retaining full access to the Single Market will be a
fundamental objective of any Brexit negotiations.
London also benefits from the UK's benign labour laws and
the infrastructure built up over many years required to support a
world leading financial capital. None of this can be easily
(or quickly) replicated by European competitors. It seems more
likely therefore that the banks and financial institutions, which
underpin the success of London will, in large part at least,
remain, keeping London as an attractive investment market in the
longer term for real estate investors.
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