Boris Johnson's UK Election Win: Investment Surge Predicted For UK Real Estate As Brexit Drama Recedes (For Now)
Within 20 minutes of the release of the exit poll showing Conservative Prime Minister Boris Johnson heading for a comfortable majority, at 10pm GMT, the pound hit a 12-month high. Ten minutes later it hit an 18-month high.
Financial markets are euphoric about the victory of the pro-business Conservative Party and an end to the first phase of the UK's Brexit drama. Investors and advisors predicted this election result will mark the beginning of a UK investment surge, as both international capital and domestic money kept pent up by uncertainty about Brexit now chase UK yields and property market liquidity.
Longer term, there are still potentially choppy waters ahead. There is a rush of euphoria that could slow down once the trade-offs involved a Brexit deal become apparent, those same market players predicted.
Boris Johnson has won, and Brexit will get done.
The result of the UK’s 12 December general election leaves Johnson’s Conservatives with a solid majority of 78. The opposition Labour and Liberal Democrat parties have been routed.
With his victory, Johnson quashed the prospect of another hung parliament in which no party had a majority, or of a second referendum to reverse the Brexit vote of June 2016. Brexit is now settled: The withdrawal agreement with the EU will be ratified and the UK will formally leave the bloc on 31 January 2020.
For UK real estate, the result is a mighty relief.
Bisnow spoke to a range of investors and their advisors to gauge the likely impact on real estate: big international money, long-term local money, opportunistic local investors, and voices in the urban living sector, both on and off the record.
Their conclusion is that a Conservative majority means a revival of the UK’s property investment market after 12 months of minimal activity. But the investment surge may be short-lived if resolving the long-term relationship with Europe begins to get complicated, or very costly for the UK economy.
The Johnson victory also means a swerve away from the defensive, protect-and-survive plans investors had developed to cope with the much longer period of uncertainty caused by a hung parliament and the second Brexit referendum that would almost certainly have followed.
“2019 has been an awful year for international investment in UK real estate. Anyone who needed investment committee approval wouldn’t have got it,” Colliers International’s Head of Cross Border Capital Markets Richard Divall said.
Yet the grounds for investing in the UK were and are good: Yields have fallen in most of the investable world, but in the UK they have risen a little. For private offices in the U.S. and Asia that focus on chasing yield, the UK appeals.
“Plenty of investors will be overweight in the eurozone, and the UK looks cheap today,” Divall said, pointing to German bank Deka Immobilien’s £145M purchase of the 1M SF B&M warehouse in Bedfordshire just days before the election.
“A lot of money will return to the UK. Not all of it, of course, but after a year of low volumes it will come back in sectors like student housing and residential. And for all those investors chasing yield and return, Europe looks expensive. A lot of money will head to North America, but if you have a choice between a 4% yield in Warsaw or 3% in Germany or 4.5/5% in London, they want to buy into London because it’s the more liquid market, especially if the predicted global economic slowdown comes to pass,” Divall said.
According to Divall this global pressure to invest, already building, will sweep into the UK now that Johnson is home and dry. London, as the largest and most liquid city, will be the biggest beneficiary.
Easy Does It
Of course, a comfortable Conservative majority is not the same thing as instant Brexit completion. Some tough decisions, and many unpalatable compromises, lie ahead. Johnson has said he will agree a new trade deal with the EU before the end of 2020 or sever ties with the common market without a deal — getting that trade deal done will be no easy task.
So will any relief rally from a Conservative win last, or will it be choked off once the reality bites on trade negotiations with the European Union, and its likely impact on the UK’s dominant service sector?
“There will still be uncertainty on Brexit, but nothing like the uncertainty we would have had from a hung parliament, which would have meant eventually a second referendum, all taking years, during which time investors would have given up on us and gone to North America and Asia,” Divall said.
“Uncertainty will not be eliminated as questions over the UK’s permanent trading relationship persist,” Investec Structured Property Finance co-Head of Origination Will Scoular said. “Still, the removal of some of the Brexit fog should help lift business investment, UK growth and with it housing activity too.”
While London will be the biggest recipient of overseas investment turning its attention back to the UK, the result will also have a big impact on regional UK commercial property markets. For opportunistic local capital, the election result may mean a few more opportunities to buy, and some welcome opportunities to sell, but wise heads are cautiously biding their time until the economic picture becomes clearer.
Like the international investors, they too expect economic heavy weather some time soon, and adopting a safety-first approach makes sense from both the political and macro-economic points of view.
Palace Capital invests around the UK regions, and chief executive Neil Sinclair said that in these uncertain times its priority is to sure-up income, reduce liabilities, and create opportunities for better days in the future. Had a hung parliament been the outcome this strategy would have been given firmer edges.
“In the UK regions, the occupational market was really tight until March 2019, when we were first due to leave the EU, and since then it has been better, with tenants getting on with things," Sinclair said. "The last six months saw a lot of lettings, and there are buyers out there in the investment market. But volumes were definitely down, and since most vendors aren’t highly leveraged, they could afford to sit and wait.”
Sinclair explained his preferred strategy. “If we have properties with development potential, because of the uncertainty we’re letting them on short leases of two or three years at discounted rents. It is a good deal for the occupiers, and income for us, and meanwhile we can see how things pan out politically and economically, and sort out our plans for redevelopment of that site which will take a few years anyway.”
Patient local capital is even more blithe than investors like Palace Capital. For them, the doings of here-today-gone-tomorrow politicians are interesting, but not usually decisive. What matters are the long-term demographic and social trends that determine what real estate is ultimately worth.
Andrew Barlow is business development director at Barwood Capital, which manages funds with £580M invested in UK real estate. He said neither the Johnson victory, nor the risk of a hung parliament, would cause him to change his strategy. Days before the election Barwood Capital acquired five care home sites which are intended to deliver more than £55M GDV and 347 beds for one of its funds, in partnership with development manager Perseus Land & Developments.
“We’re all about long-term trends and we’re investing in sectors like logistics and elderly care where we see a good long-term dynamic. We’re about acquiring underperforming sites where there is always value to capture,” Barlow said.
Indeed, investors in the ‘beds’ sectors have been fairly impervious to the political uncertainty that has afflicted sectors like offices. An analysis from Real Capital Analytics showed that in spite of the impending vote, November was the strongest month for UK property investment this year, with £4B of deals completed or pending. But half of these deals were in rented residential, far higher than the long-run average for such deals, which typically account for less than 10% of UK investment.
“Here, investors are allocating capital based on long-term shifts in demographics, urbanization and public policy,” RCA Senior Director of EMEA Analytics Tom Leahy said. “These drivers are unlikely to change in the event of any switch in government.”
Hoorah For Boris
This enthusiastic response to the Johnson victory is mirrored by residential developers building homes for sale and for rent.
Birmingham-based Urban Village Capital Executive Director Kevin Sharkey said he hopes the last few difficult months are over. He has been holding back on a number of contract signings awaiting the election result — and now he can press ahead.
“Uncertainty surrounding both Brexit and the general election have made the new-build sales market very difficult over the last few months,” he said. “We have had a number of schemes that were initially developed for open-market sales that we have now changed into rental schemes because of the difficulty in selling units.
“Development funding is still available in the market but the continued uncertainly that a hung parliament would have brought would have a negative effect on both development funding available and appetite for developers to get schemes started. A Conservative majority delivering a clean Brexit would give the market the certainly it needs to move forward positively into 2020.”
SevenCapital Group Managing Director Damien Siviter agrees enthusiastically.
"For the housing market, today’s election results should result in a positive boost to both activity and to prices," Siviter said. "As with any market across the UK, the property market reacts to levels of certainty. With one of the strongest majority results in years, this activity looks likely to be very positive."
Beware of Victory
The new Johnson government may have a majority, but it doesn’t have everything its own way. The economic and political realities of Brexit are out of its control, and could lead to upsets as the UK prepares to face another potential no-deal cliff edge at the end of 2020.
Yet, as Gerald Eve senior associate Leo Nicholson said, UK real estate faces dynamics like demography and macro-economics that make politics look like a sideshow.
“Commercial property has performed relatively well overall, returning just under 20% since the referendum in 2016, approximately one third ahead of FTSE 100 performance during this period,” he said.
“The ongoing uncertainty from the prevailing macro-economic and political landscape will remain outside the control of investors and developers. With the UK economy growing ahead of the eurozone, interest rates likely to remain unchanged or fall, gilt rates at or close to all-time lows and the stock market volatile, commercial property with solid fundamentals should continue to attract domestic and overseas capital.”
The election result feels like the end of something, and the start of something new. It certainly puts the immediate problems of Brexit to bed, and it inaugurates a new phase of majority government. But what happens with longer-term trade talks remains as cloudy as ever.
Johnson is famously happy quoting Latin tags and is reputed to read Greek verse before bed. But there is a saying in the earthy tea-drinking English of Lancashire and Yorkshire that he might just bear in mind as he contemplates his victory. There is many a slip between cup and lip, it goes. The classically trained prime minister will hear this as a warning against the Greek concept of hubris.