The UK commercial property market is undergoing a “mid-cycle adjustment” rather than a downturn, according to the CIO of The Crown Estate.
Paul Clark, who oversees a £11.5bn (€13.4bn) UK portfolio, told the MSCI/IPF Property Investment Conference in Brighton that there were “not enough elements in place for a downturn”.
He said capital markets had slowed, bidding was less competitive and the risk premium for real estate had come under pressure – but these factors alone did not portend a downturn.
Clark pointed to a number of positive factors: the expectation that interest rates will remain low; the “weight of capital looking for yield”; devaluation of sterling and the “underlying strengths” of UK real estate.
A “big caveat”, however, was the potential for Brexit to have a short-term negative impact, especially on financial services in London, he said. But a UK departure from the EU was “not necessarily bad for the UK long-term”.
The Crown Estate is exposed to central London office and retail, representing 58% of its portfolio (the rest is in regional retail, offshore wind and land). The organisation, whose profits go directly to the UK Treasury, owns all of Regent Street and much of St James in London.
Clark said The Crown Estate sold more than £600m in assets before the UK referendum in June this year and capital markets had already begun to slow.
It is tempting to look at the UK market “through the prism of the EU referendum”, he said, but, “if anything, the referendum has propped UK real estate up more” due to responses by the Bank of England.
The Crown Estate’s strategy was “underpinned” by the “fundamental truth that real estate is cyclical”, Clark said. “There are no new paradigms, just differing factors.”
Clark was speaking at the annual conference in the south of England organised by MSCI and the Investment Property Forum (IPF).
A straw poll of the audience – a gathering of some 200 fund managers, investors and advisers – showed that nearly three-quarters (71%) expected UK real estate to “flatline” and produce sub-5% total returns over the next two years.
