As the third anniversary of the Brexit vote nears, the uncertainty surrounding the UK’s exit from the EU is holding back many in the country’s commercial real estate sector. Yet for those sophisticated investors with long-term confidence in the UK, the reduced congestion around potential deals could lead to new opportunities.
The June 2016 referendum had an immediate effect on fund outflows, but lending volumes have been relatively stable since. According to Cass Business School, the totals for 2016 and 2017 were around £44.5 billion (€51.6 billion), while 2018 saw a rise to £49.6 billion. Although these figures mark a fall from the £53.7 billion in 2015, that was at the peak of the cycle.
The referendum came as investors and lenders were already considering the late-cycle characteristics of the market. The shock result undoubtedly made investors pause for thought. But for those who recognised the market’s strong fundamentals, transactions continued.
Overall investment activity is down this year. This is, for the most part, a consequence of the political uncertainty ahead of the UK’s original departure date of 29 March. The uncertainty is set to continue, possibly until the new deadline for a withdrawal agreement on 31 October.
Trick or treat?
Nevertheless, Brexit’s deferral until Halloween may represent an extended opportunity. Pent-up demand may well translate into transactions in Q2 and Q3. With the pound more than 20 percent weaker than in 2015, global investors could secure a relative reduction in the pricing of UK real estate.
Lenders can mitigate the political risk by supporting strong, well-capitalised sponsors on well-let buildings with deliverable business plans. Legal & General Investment Management Real Assets this year provided £420 million of debt to support Almacantar on One and Two Southbank Place, a central London office investment underpinned by a stable income stream from Shell.
UK commercial real estate remains a credible prospect for debt and equity investors in the current low-interest rate environment, with yields higher than those for UK government bonds. Oxford Economics has forecast real annualised GDP growth of around 1.8 percent in the UK in 2018-22. This would put the country behind the US at 2.1 percent, but ahead of the eurozone at 1.5 percent.
Long-term trends support the future of UK real estate, but not all sectors are equal. The rise of online retail is positive for logistics, but more challenging for the high street and shopping centres.
There is a need for more housing of various tenures; and the increasing number of people choosing to lease their accommodation has given rise to build-to-rent, which is an emerging sector for debt and equity. Real estate debt will play a key role in supporting the growth of this sector, irrespective of the continued political uncertainty.
We cannot ignore the risks around Brexit, but it represents an unhelpful backdrop rather than Armageddon. For long-term investors seeking assets that offer performance regardless of political volatility, these are unique times.
Lorna Brown is head of real estate debt at Legal & General Investment Management Real Assets