A slowdown in transactional activity, Brexit fallout and the suspension of several UK property funds could create opportunity for dollar-denominated opportunistic investors.

With the full impact of the growing number of fund freezings unknown, it is likely there will be winners and losers – the former could be those with significant undeployed capital and an eye on potential opportunities, encouraged by a weak pound.

Starwood Capital, expected to achieve a first close on its latest global opportunistic fund, sees Brexit as a potential reason to consider UK property.

Kristen Varela, portfolio manager of real estate for New Mexico PERA, which committed $75m to the fund, said Starwood has been following the Brexit situation in the UK “for the past six months”.

He said: “The manager is of the opinion that there might be some investment opportunities to take advantage in that region in the future.”

Just days before the UK held a referendum on its EU membership, KKR said it had raised $739m for its opportunistic KKR Real Estate Partners Europe vehicle. Earlier this year, Kildare said it was looking to raise $2bn for a second European fund, with the UK among target markets.

After recently raising €700m for its fourth pan-European fund from US, European investors and Middle Eastern and Asian investors, Benson Elliot managing partner Marc Mogull said its investors expect the firm to “exploit the opportunities volatile markets present, whilst keeping a careful eye on risk exposure”.

He said: “Market uncertainty and change are constants in our world.”

Backed significantly by US pension funds, Tristan Capital Partners, which has around a quarter of its assets in the UK, still has close to €1bn to invest.

This week, Cameron Spry, head of investments at Tristan, admitted that it was too early to know the full impact of Brexit on property valuations, but said opportunities could arise at the end of the year.

Once property companies and funds publish annual results, the outlook will become clearer, Spry told a press conference on Monday, hours before the first UK property fund – managed by Standard Life Investments – suspended trading. “The UK could see prices come off, so you could look at that as an opportunity,” he said.

A spokesman for a major US dollar-denominated investor said logic dictated that some forced selling by funds will create opportunities. Pricing is already a factor, with assets cheaper than just a couple of weeks ago.

For the moment, the prospect of forced sales looks limited. Standard Life says it will adopt a “controlled selling process”, while Aberdeen has sought to encourage investors to remain in its fund to avoid selling in the market at a discount.

Should the funds be forced to sell assets, the likelihood is that properties brought to the market will be relatively small. Standard Life’s fund, for example, owns 124 properties with an average value of £19.9m.

What frozen UK property funds have on their side is an historically liquid market and no shortage of reasons why real estate remains a better option than stocks or government bonds.

Although, as CBRE’s head of research, Miles Gibson, recently pointed out, “hesitancy” among occupiers is likely, as Brexit’s impact on sentiment affects decisions by manufacturers, retailers, and office occupiers.

Faced with this uncertainty, investors will ask themselves if owning a portfolio of small, multi-let assets spread across the UK is a safer investment at present than a City office tower let to a single tenant.

Regardless of asset location or tenant, values are clearly not expected to rise anytime soon. The likes of Tristan Capital – and Spry, a believer in short, sharp cycles – are waiting. They are not alone.

 

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