Editor's Choice: Brexit blues

UK property stocks took a beating this week following the news that London mayor Boris Johnson has put his weight behind the campaign to take the UK out of the European Union in the 23 June referendum on whether it should stay or not.

Things could get worse. Should the UK leave the EU, there will be a ‘significant impact’ on London’s office sector, Stuart Gulliver, CEO of Britain’s largest bank HSBC, warned earlier this week. About a fifth of the jobs in corporate and investment banking could then leak away from the UK capital to Paris.

Dutch banking giant ING has already unveiled plans to exit London should the UK leave the EU. ‘If a number of large banks leave London, we will go with the flow,’ the company’s CEO Ralph Hamers told news wire Bloomberg. ‘The financial markets circus will either stay in London or go somewhere else.’ ING has 650 staff in the UK capital.

If the UK does exit the EU, UK property – including listed firms – will undoubtedly take a hit, at least in the short term. In a research note from Credit Suisse ‘Brexit: breaking up is never easy or cheap’, analysts predict that the price of UK assets, particularly property, equities and gilts, will fall.

But Brexit would produce winners as well as losers, noted David Hutchings, head of EMEA investment strategy at Cushman & Wakefield, in a commentary published earlier this week by PropertyEU. A notable risk, in his view, is the potential for the UK itself to break up as regions pull in different directions.

Systemic shock with a ripple effect
In the long term, all areas in the UK could expect to lose some occupiers, Hutchings noted. ‘But,’ he added, ‘London could still be a winner overall, able to stand alone as an independent financial megacity: the Singapore of the north perhaps, continuing to rival New York as the foremost global hub market.’

Back on the continent, a potential winner of a Brexit would be Germany. The country already has safe- haven status within Europe and growing fears that the UK may leave the EU could catapult more investors into the country, market watchers told PropertyEU.

‘Germany could benefit from a Brexit in the short-term,’ argued Robert Stassen, head of EMEA capital markets research at JLL. ‘A Brexit could increase its safe-haven status.’

On the other hand, if the UK does vote to leave, the whole of Europe would be in for a tough time, he warned: ‘There will be a lot of volatility in real estate pricing, both in Europe and globally. It would be a systematic shock to the system with a ripple effect. Investors will take a wait-and-see approach.’

Regional markets could be in for a rough ride
European investors like the Germans, who have invested heavily in the UK in the last few years, are likely to hold back on making investments until the result of the referendum, according to Rob Wilkinson, CEO of AEW Europe. Increased caution will not only affect London: in the short term, many regional UK markets will be hit as well and could face an even rougher ride amid uncertainty over the UK’s role in Europe.

Now that the discussion on the merits of an ‘in’ or an ‘out’ has irreversibly gathered momentum, some analysts are claiming that the overall effect on the London market in particular may be small. Office vacancy rates in the UK capital are at a 14-year-low, and only 3.4% in the West End, noted James Roberts, chief economist at Knight Frank. Moreover, he added, demand is still on the rise, driven by creative and technical services.

Indeed, some market watchers are arguing that now may be a good time to reinvest in UK property stocks. Amid the ongoing turbulence on global stock markets, UK property stocks are currently trading around 22% below net asset value, according to Thomas Veraguth, Head Swiss & Global Real Estate Strategy at Zurich-based UBS. ‘This is an excessive discount compared to the valuation of property shares in Continental Europe, the US and even some listed markets in Asia.’

Marginal losses
By contrast, German property stocks, bolstered by a resilient economy at home, have suffered only marginal losses since stock markets headed south last November. The German Real Estate Stock Index DIMAX, compiled by Stuttgart- based private bank Ellwanger & Geiger, has fallen by only 6% in the last three months. And overall, continental European listed real estate stocks have performed relatively well compared to the broader quoted market.

The disparate performance of two companies on the Swiss Stock Exchange aptly illustrates the point. Last summer, Zurich-based industrial holding Conzzeta was given the thumbs-up by investors when it decided to spin off its residential arm Plazza. At the same time, the outlook for its newly floated property company was viewed as being far more uncertain.

Since then, however, Conzetta’s shares have plunged more than 20% below their 2015 peak while Plazza shares have been trading at a discount of less than 8% below their first market quotation.

The beauty of property stocks is that they are backed by real assets. As the UK and Europe grapple with the latest storm, investors with the Brexit blues may find comfort in the knowledge that property stocks act like a buoy in a rough sea when market winds become strong southerlies.

Judi Seebus
Editor in Chief