The depreciation of the pound, coupled with a slight drop in capital values, has led to an average discount of 16% on UK commercial real estate for overseas capital, according to a report by property advisor JLL.
Launched to coincide with UK prime minister Theresa May's move on 29 March to trigger Article 50, to start the process of withdrawing from the EU, JLL's findings highlight that the depreciation has spurred increased investment in the UK from the Middle East and Asia Pacific regions in particular.
That said, the market has experienced less capital inflow from the US and global funds.
The UK is set to benefit from the emergence of Chinese capital globally despite Brexit, according to Alistair Meadows, head of UK Capital Markets at JLL. 'Chinese investors now rank just behind US as the second largest source of global cross-border capital and we expect them to have an increasing influence on the UK market.
'Many investors from China and the wider Asia-Pacific region come to the UK with different motivations and return aspirations to traditional UK and global investors. They seek diversification and safe haven forms of investment, and are attracted to the depth, liquidity and familiarity of the UK market,' he added.
Currency movements
Although currency movements have not had a strong historic correlation with overall international capital inflow into the UK, they are part of the reason why the market has experienced a recent surge in demand from buyers from the Middle East and the Asia Pacific region, headlined by Hong Kong and mainland China.
For many long-term investors, sterling deprecation provides an added fillip to the investment case, notes Ben Burston, head of UK Office and Capital Markets Research at JLL. 'This is based on their perception that it may appreciate once there is more clarity around Brexit and its economic implications, but it is not a case of one-size-fits-all.'
Private investors have responded to the depreciation more than institutions and global asset managers, and as a result they have become a more important driver of market sentiment and pricing. In recent months, international investors, mainly from Hong Kong, have picked off a number of big-ticket assets in London, helping to keep its key sub markets afloat despite concerns Brexit will scupper the city's massive financial sector.
Overall, overseas investors accounted for 48% of transactional activity within the UK market in 2015 and a slightly higher 51% in 2016, with the increase likely to be due in part to the currency movement, JLL said.
Investment inflows from the Americas (primarily the US) fell from 32% of total overseas investment into the UK to 17% in 2016, with the share of global funds (where the ultimate source of capital is split across multiple countries) also falling. In contrast, Asia-Pacific and European (excluding UK) based investors recorded a surge of investment, with the Asia-Pacific share rising from 17% to 28%, and Europe from 14% to 23%.
Caution will likely prevail
The UK referendum result caught many people by surprise last year and created short-term turbulence in the market, but everyone has now had time to get used to the well-signalled triggering of Article 50, notes Colin Wilson, Head of UK & Ireland, Cushman & Wakefield. 'While it is an important moment, it is an expected and largely symbolic act compared to firstly, the date two years from now when the 24-month window for negotiations concludes, and secondly, the many twists and turns that we can expect along the way. It is of more interest to me what that road map looks like.'
In the property industry, transactions usually become more complicated the more parties there are at the table, he adds. 'The UK is in effect dealing with 27 member states whose interests do not necessarily align on every issue, while France and Germany have elections which could significantly alter the negotiation process. At this stage nothing is certain. As a result, caution is likely to remain a prevalent theme among investors and occupiers. That said, there remain many positive indicators of global and UK economic activity which are positively impacting UK real estate. In many respects we are seeing a bias towards "business as usual", despite the Brexit backdrop which is encouraging.'
Two-year 'road bump'
In an alert, Knight Frank chief economist James Roberts noted that the idea that there may be a comprehensive trade treaty in place at the end of just two years of negotiations seems 'fanciful'. But, he added, overall the tone of the Prime Minister’s letter to the EU is 'realistic, conciliatory, and a step away from the hard Brexit rhetoric we heard at last year’s Conservative Party conference.'
'The call for a prompt start to technical discussions might point to an early interim agreement covering areas of the economy that are critical for both sides, such as financial markets, to act as a bridge to a full free trade agreement further down the line,' he added.
As talks progress between the UK and the EU, some sabre rattling from both sides can be expected, Roberts said. 'Yet, whatever the outcome of the talks, the fact remains that the UK is a G7 economy with 65 million consumers. Global firms like Apple, Coca Cola, Google and Samsung will always want to access a market that big, as will EU firms like AXA and BMW. There are fundamental strengths within the UK economy that will outweigh the short-term effect of the Brexit talks, and draw business activity to the UK. This is just a two year road bump.'
