Problems Remain, But International Investors Think Brexit Clarity Will Boost London Prices
On 1 January 2021, the UK left the European Union with a trade agreement in place. After almost four years of uncertainty, there is now a much clearer picture of what the UK’s post-Brexit relationship with the EU will look like.
That uncertainty is widely regarded as having depressed London and UK real estate prices and volumes, with yields in London now higher than in rival European cities like Paris, Berlin and Munich, an inversion of the historical norm.
Bisnow canvassed a group of international property investors about the impact of a Brexit trade deal being reached, and while some uncertainty remains, there was a general view that prices for the best assets in the UK capital and beyond should rise to converge with those European peers. The impact of COVID-19 is still to play out in full, and riskier assets could see prices continue to fall, but with one of the key factors niggling global investors removed, London will perform relatively well in the coming months and years, the investors said. Here is how they see it.
Mark Ebbinghaus, Chief Executive Officer Europe, ARA Asset Management
“We think finally sidelining the Brexit distraction will have a positive impact on the appetite of international investors for London and UK real estate; however, the smart money was in our view factoring in a resolution to the issue in any case. On pricing grounds, the UK on average still looks relatively more attractive than broader Europe on a like-for-like basis; however, the question remains for all real assets in a post-pandemic environment as to potential changes in the taxation environment given significant fiscal deficits.
“The demand for UK real estate has in our view been undiminished over the past year, and less impacted by the Brexit status than the global pandemic, and given the accommodatory fiscal and monetary policy in the region there is likely to be strong demand on the bid in 2021, with pricing for premium/core assets remaining strong. However, there will be widening gaps between buyers and sellers in other higher risk and value-add strategies requiring significant asset management.”
Roger Orf, Head of European Real Estate, Apollo Global Management
“[The agreement] provides certainty as it relates to goods, which is 20% of our economy, which we now know won’t be subject to tariffs. Labour costs are likely to go up, as there will be fewer workers. This will be passed along to development costs, which will increase somewhat. Rents will come down, as Brexit uncertainty in the service sector will remain.
“At the margin, London and the UK are less attractive places to invest. Fewer immigrants mean less growth and a slower economy.
“Brexit concerns have been vastly superseded by the aftermath of COVID-19, where working-from-home trends and changes in retail shopping cast a great shadow over the UK.”
“London continues to be a strong global hub and a place that will continue to attract the best talent from around the world. With certainty on Brexit and the beginning of the end of COVID being in sight (with the vaccination already being implemented) we expect very strong momentum in the UK market in 2021.
“We therefore continue to be optimistic about London from an investment perspective. We would not be surprised to see the yield gap between London and European core markets such as Berlin narrowing even further. It will be more important than ever to deliver the best real estate in the market; healthy, sustainable and inspiring; places where people actually want to go after the pandemic. That is exactly the product we will be delivering, and we believe there will be strong demand for this product, both from tenants and from investors.”
Nick Leslau, Chairman, Prestbury Investment Partners
“The welcome recent Brexit deal will provide a much-needed baseline from which property investment decisions can begin to be made, in particular when the detail in relation to different sectors and its impact is fully understood.
“Historically, to track the fortunes of commercial property price inflation you only needed to follow the UK’s GDP growth. Will it be different this time, with the dramatic impact COVID-19 has had on national earnings at the same time as the impact of Brexit?
"This new Brexit deal on its own would not, in my opinion, have made a material difference to property price performance, but the combination of both, in particular the pandemic, will generate considerable caution on the part of investors resulting in a polarisation of values. Low interest rates will see the best of breed continuing to command premium pricing, but there will be an undoubted softening of values for anything not in that category.
“With the exception of prime Central London grade-A office space, there will be a reduction in demand, and rents and yields will respond accordingly. Logistics will enjoy its continuing attractiveness to investors but it is doubtful to me that the nature and rate of expansion will be continued, as vaccination permits us to come out of hibernation and physical retailing starts to fight back. The late logistics entrants will enjoy nothing like the value gains of the early birds.
“Physical retail will adjust to the new normal, which is not nearly as dire as many predict. It has shrunk hugely, but with each passing day we miss being out and about and enjoying our once-normal activities, and we appreciate that physical shopping is one of them. Equally, hospitality will bounce back but with a vengeance and, whilst rents will adjust very materially, there is every chance that there will be huge appreciation of pleasure of being out and about and in other people’s company. In anticipation of that, there should be some interesting value plays in the out-of-favour sectors.”
Indraneel Karlekar, Senior Managing Director, Global Head of Research and Strategy, Principal Global Investors
“It clarifies trade but not services, and so the uncertainty around London hasn’t entirely gone away. So I think international investors will want to play a waiting game until there is some more clarity. If there is greater clarity in coming months, COVID gets tamed and London emerges as more tax friendly/competitive, I think we will see global capital become interested.”
Pat Gunne, Founder, 3RE Capital Ventures
“Markets of any asset class like certainty, so any form of agreement irrespective of the micro detail is a positive. The strengthening of the pound in the aftermath is an indication of the positive reaction to a deal being done.
“Brexit noise is amplified in Britain and Europe due to the implications on businesses trading goods and services in the region; however, outside of Europe it is less of an issue for investors in their decision to allocate capital, particularly Asia and the U.S.
“London will continue as a global powerhouse to be a magnet for attracting international capital, and now that Brexit gives clarity, the discussion on pricing and where to invest will revert to the other pieces of the jigsaw, namely the cycle itself, the economy post-pandemic, implications of work-from-home on longer-term occupier trends and the continuing impact of central bank policies on longer-term interest rates which continue to be anchored by excess liquidity.”
Jim Blakemore, Partner, BentallGreenOak
“The removal of the uncertainty of a no-deal Brexit will lead to prime London yields moving closer to those in Frankfurt and Paris.
“The lack of an agreement as far as services go will mean more London-based businesses will establish or expand a meaningful presence in Europe.”