When IPE Real Estate held its annual conference in Amsterdam in May, there were a number of discussions about the disruptive forces at play in the real estate sector. The possibility of a UK departure from the European Union was one of them, but there was an air of assumption that a vote to remain would prevail.
Fast forward several months and such assumptions look naïve. Given an abrupt reality check, investors have moved political risk up their agendas.
Brexit will have important repercussions for the UK real estate market – as discussed here. And, as an effective vote of no confidence in the European project, it also has implications for the continent.
But, more importantly, it is a sign of the times. The result of the referendum can be seen in part as a populist backlash against globalisation and an indication that the world is about to experience a renewed period of protectionism, as governments look to erect barriers rather than knock them down. Donald Trump went beyond the metaphorical to the literal when he talked of building a wall along the US-Mexican border.
Before the UK referendum, the biggest risk seemed to be too much capital pushing up prices to unsustainable levels, fuelled largely by an unprecedented programme of monetary easing and low interest rates.
Today, investors have suddenly become very interested in national elections. We look at the outlook for a number of European real estate markets and when voters will be heading to the polling booths.
For the time being, investors are showing no signs of abandoning the UK market in the wake of the Brexit vote – see here.
According to Andrea Orlandi, head of real estate for Europe at Canada Pension Plan Investment Board (CPPIB), the long-term plan stays the same; the UK will remain the investor’s main market in Europe. CPPIB is “sensitive” to political risks, but as Orlandi explains: “If we are investing on 10 or 20 years, the political risks are cycles. We are more focused on the fundamentals of the market.”
The UK and continental Europe might stand to benefit from greater volumes of capital from North America. According to Eric Adler, CEO for Europe at PGIM Real Estate, US pension funds are moving away from the tradition of only investing in Europe opportunistically.
He explains how they are increasingly looking to allocate long-term capital for core investments. This could be the catalyst needed to develop Europe’s open-ended fund sector to something comparable with that of the US. “It’s the US money that changes things,” he says.