International capital shrugs off Brexit

Donald Trump's victory in the US presidential elections has downgraded Brexit from major problem to minor event, one which could even be regarded as an opportunity, delegates have heard at the PropertyEU Outlook 2017 – Europe & the UK briefing, which was held in London in November.

Trumping Brexit
'Trump has deprioritised Brexit,' Michael Walton, CEO of Rynda Property Investors, told the briefing, which was held at the City of London offices of BNP Paribas Real Estate. Foreign institutions that had stopped dead in their tracks after the surprise referendum result have abandoned their wait-and-see attitude and are now investing again.

'Some large Asian institutions decided in July not to invest in the UK and to look at the US instead, but now that the UK has dealt with Brexit as well as it could have they have decided to look back at the UK after all,' said Will Rowson, partner at Hodes Weill & Associates. 'Part of that interest is due to currency, as a 20% discount is a good place to start, but the fact is that positive sentiment towards the UK has actually increased after Brexit.'

Post-referendum, 'there is a renewed appetite from Middle Eastern and Asian investors, who see things differently and do not regard Brexit as a huge issue,' said Simon Williams, head of investment at BNP Paribas Real Estate. 'They have confidence that the UK will remain a stable place for them to park their cash.'
German funds’ renewed appetite

The surprising resilience of the market has even persuaded new or long-absent investors to put their money into UK property. 'Due to the weak pound the German funds are showing a renewed appetite for the UK, which is very encouraging as they are usually extremely canny and look for value for money,' he said.

'Some people have been disappointed by how well the UK has done after Brexit,' said David Inskip, director of EMEA strategy and research at CBRE Global Investors. 'The opportunists who have swooped down, thinking of finding bargains, have gone away again. There have been positive net inflows in funds, but no correction and no bargain basement deals.'

The UK economy continues to do well, outperforming both France and Germany, the government seems stable with no threat of early elections and real estate values are ending the year higher than before the vote.

Uncertainty over London offices
Despite these positives, Sukhdeep Dhillon, senior economist at BNP Paribas Real Estate, pointed out there is still much uncertainty as to what Brexit will actually entail. 'Various outcomes are still possible,' she pointed out. 'A hard Brexit, meaning no preferential trade agreeements for the UK, some tariffs and a loss of passporting rights, could force institutions to relocate or to scale back their London operations, and this could cause a drop in occupier demand.'

The new office development pipeline in central London could also run ahead of recent rates of net absorption, and a drop in demand could see vacancy rates rise and rental values start to fall. The fact is that 'nobody knows the shape and scope of changes to come’, said Williams.

UK regions coming to the fore
The UK is proving to be a more resilient market than many expected, and real estate investors are moving beyond London to other regions in the UK which are seen as less vulnerable to possible Brexit referendum after-shocks.

'Looking ahead, the UK regions will be more interesting places for investors to deploy their money,' said Williams. 'In places like Birmingham there is a lot going on and a positive feeling that things are getting better. People are a lot less nervous about the impact of Brexit on their local economy.'

Outside of London there has not been much development in major cities so far, and people see a buying opportunity not just because of the weak pound but also because 'they see value and a transparent, well-regulated market’, said Williams. UK cities and regions outside London should also start to benefit from the country-wide push on infrastructure and house-building announced by Chancellor of the Exchequer Philip Hammond in his Autumn Statement in November.

Opportunities up North
'Investors will definitely look more at regional opportunities in the UK,' said Inskip. 'If you go to regional cities, even the financial services companies are less impacted by Brexit because they are more focused on the domestic market. There are growth prospects in these secondary locations, but it may be a trade-off, high yields for less liquidity.'

Local players have contributed to the renewed interest in British property and they are not the usual suspects, Williams explained: 'Local authorities have replaced some of the funds that have withdrawn. They are replacing income lost from central government cuts by investing in property, as it guarantees income and generates returns.'

Rynda Property Investors, which had not invested in the UK for many years, is now looking at the country again and focusing on the North, said Walton: ‘It is easy to focus on the negative aspects of Brexit, but some regional businesses are doing tremendously well. We like the North of the UK and we focus on value-add opportunities in the office market, as there is strong demand and a strong letting market.'

The only downside is that it is harder to find debt finance in that market, he said. In general, Brexit and the presidential election results in the US are having an indirect but negative impact on the availability of debt, said Walton: 'The protectionism heralded by Trump could affect the debt market in the UK. People looking to advance 5-year loans are now more cautious, as they do not know what the world will look like in five years’ time.'

Debt is less available especially for small or value-add deals, leading some value-add specialists to consider leaving the UK, said Rowson: 'It is true that debt is getting more expensive and in some cases harder to find.'

Logistics the ‘star performer’
Geopolitical uncertainty and big upsets like Brexit and Trump's victory in the US have focused investors' attention on fundamentals and strong underlying trends, experts agreed. In this context, it is unsurprising that logistics, the 'most politics-free' of sectors, emerges as a winner.

'Looking ahead I would definitely pick out logistics as the star performer,' Inskip said. 'Investors have reached a point where they are cycle-aware and know they have to look at the big themes, and big box logistics is one of them.' The investor base has widened for the logistics sector and it now includes institutions and companies that until recently would only have looked at central London offices, he said.

'There is a huge appetite for logistics now because people see structural and demographic changes,' said Williams. 'People look at the real economy and at what is happening in the real world to identify opportunities in real estate.'

According to BNP Paribas Real Estate forecasts, UK property will deliver total returns of 0.2% in 2017, and while offices are expected to drop by 5.5%, retail and industrial will deliver better returns of +1.7% and 3.7% respectively.

Residential more attractive
The institutionalisation of residential is also a sign that investors are looking at real-world trends. In the UK, for example, the strong increase in house prices and slower wage growth have drained private money away from the market. Young professionals are now forced to rent for longer before they can afford to buy, so the gap in the housing market left by the withdrawal of private money is increasingly being filled by institutions.

'Institutional appetite will only grow, and the UK institutional market for residential will become as well developed as Germany's,' said Williams. 'It provides good returns and security of income, as there is a very low risk of having an empty building.'

The UK and the rest of Europe are likely to follow in the footsteps of the US and develop an American-style, multi-family private rented sector (PRS), said Rowson: 'PRS was horribly boring before the crisis and wonderfully boring during the crisis, as it delivers good returns.'

Question marks remain
The panellists agreed that alternative sectors, from student housing to care homes, will also continue to be in demand, again because they reflect underlying long-term social trends which are independent of political events.

However, the property sector cannot ignore a number of elections and events in Europe in the next year which have an uncertain outcome and could have a significant impact on real estate. 'The market is still underestimating the chances of other populist overhauls and the impact of the rise of populism across Europe, from Italy to France,' said Dhillon.