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Will London’s Slowdown Continue Now Brexit Has Been Delayed?

London’s investment and leasing markets slowed in the first quarter, and the common consensus is that investors and occupiers delayed making decisions as the UK approached the date at which it was supposed to leave the EU.

That date has now been pushed back to October. So will the slowdown be extended, with London and the UK suffering a moribund year? Bisnow asked a host of experts what the deferred date means for UK property. Some thought a continued drop-off in the market was inevitable, apart from in a few resilient sectors. Others thought that even if things do pause, it will actually be nothing to do with Brexit. Here’s everything you need to know, from London offices, to retail and logistics, BTR and student housing.

Walter Boettcher, Chief Economist, Colliers International — The Worst Of All Options

An organised exit is probably better than a disorganised one, but a “flextension” is certainly not a game changer and may have been the worst option given the parliamentary gridlock. In fact, the six-month extension looks to be too short for property investors to ignore the uncertainty and pursue their delayed investment plans, but too long to prevent a disruption to the final quarter of the year, when property sector transactions usually peak.

Property investors pursuing purely opportunistic strategies will be disappointed with last night’s agreed Article 50 extension which postponed an imminent hard Brexit. Likewise, real estate brokers looking for market movement will have found little to be cheerful about given extended uncertainty. Businesses will also not have found any compelling cues to release cash reserves for expansionary investment in facilities, equipment or acquisitions to grow their businesses.

Silvia Dall’Angelo, Senior Economist at Hermes Investment Management — Depressed Productivity Continues

Hermes' Silvia Dall'Angelo

For the time being, the only certainty is that the extension means more uncertainty for longer. That will continue to weigh on business decisions — notably on investment — in turn resulting in sluggish economic growth and poor prospects for an already depressed productivity performance.

Guillaume Cassou, Head of European Real Estate, KKR — Moving Toward A Softer Brexit, But Maybe Also A Corbyn Government…

For real estate markets, we should see a continuation of the ongoing trends: softness in London resi, major challenges in the retail sector, good fundamentals in sectors like logistics or student housing. The London office sector will continue to see different dynamics by sub-market depending on the demand/supply trends.
 
Given the past few weeks, the base case points toward a softer Brexit vs initially envisaged — which is positive — but this is coupled with an increased risk of general elections with a Corbyn scenario — which wouldn’t be seen as a positive for the country and the RE markets. So I don’t expect a major difference in investors’ sentiment towards the UK in the very short term: There will be some activity but lower volumes than if this issue had been settled.

Robert Houston, Senior Partner, St Bride’s Managers — Don’t Blame Brexit For Slowdown

Robert Houston in 2018

There is a temptation here in the UK to believe that the recent reduction in property investment volumes is as a result of the Government’s faltering Brexit negotiations. In fact, what is playing out here in the UK is being replicated across all the main global markets. Like other countries, the UK will be impacted by a general slowing of the global economy.
       
After a tremendous run, we are reaching the natural end to the investment cycle. The reduction in transaction volumes is, in part, caused by a lack of worthy alternatives for investors for proceeds from sales, which of course, becomes self-perpetuating; the round trip cost of selling and reinvesting, which is a disincentive at a time of lower returns; and the price expectancy gap between buyers and sellers, particularly in the retail sector.
       
If the current lack of transaction activity persists, this will inevitably lead to lower agents’ and lawyers’ fees/profits. The market should not confuse negative comments from these quarters with poor investment market conditions. Irrespective of the outcome of Brexit, the UK, and London in particular, will remain very high on overseas investors’ wish-lists due to its variety, transparency and general liquidity. The extension of Brexit to the end of October will have a neutral impact on the UK’s economic and property investment fortunes.

Etienne Prongue, Deputy Chief Executive, BNP Paribas Real Estate UK — Sellers, Not Buyers, Causing Investment Slowdown

Short term, the decision to defer the UK’s leaving date from the EU will not change our economic view. BNP Paribas forecasts 1.1% economic growth this year. Undoubtedly, the lack of clarity and prolonged uncertainty is having an impact on business sentiment in the real estate market and on spending decisions.

However, there is continued investor appetite and the majority are still actively looking for opportunities, but clarity over our future relationship with Europe would certainly increase purchaser and vendor activity in the market. Despite this uncertainty, the fundamentals for London are still very good and the capital remains a hugely attractive city to invest in. London is and will continue to be a leading global city, attracting global talent and business. Employment is still high in the capital and across the UK, which shows that companies wish to attract and retain talent and they will continue to take good quality space as we have seen over the last few years.

A lack of Q1 sales volume, particularly for West End and the City, was largely due to low stock coming to the market rather than investor appetite. Furthermore, this general slowdown in transactional volume is not specific for the UK as Germany and France have witnessed a slow start to 2019.

Madeleine McDougall, Head of Real Estate, Lloyds Banking Group — Look Outside Of London For Opportunities

The delay to the UK leaving the EU may continue to drive uncertainty, and while volumes have inevitably been impacted in [the] first quarter and [by] the challenges facing the high street retailers, we are seeing a good volume of opportunities coming through in recent weeks on investment and development in North of England. In Scotland, residential development remains strong; in the Midlands, we are seeing more interest for investment opportunities.

Despite the uncertain environment that businesses are operating in, [the] majority of clients remain positive and are building up cash/facility headroom to enable them to move quickly on new acquisition opportunities, should they arise.
 
Businesses are also using this time to review existing facilities, locking into longer-term lower rates and steering towards developments where the value is iterative over time, as opposed to investment where it may look different in six months’ time. 
 
What is reassuring is that property yields remain close to 5% vs. 10-year gilts at circa 1%. In comparison, continental yields are significantly lower, which bodes well as overseas demand remains resilient.

Tom Leahy, Senior Director, EMEA Analytics, Real Capital Analytics — Asian Buyers Look Elsewhere

I would say that the more structural trends affecting the market will remain unchanged and assets like PRS, hotels and logistics will remain in demand. However, RCA recorded fewer than 30 Central London offices changing hands in Q1’ 19, just over half the long-term average, and a subdued transaction market is likely to persist while the outcome remains to be confirmed. There are signs that the South Koreans, who were enthusiastic buyers in Central London last year, have switched attentions to continental Europe and that, combined with some of the restrictions in moving capital out of China and Hong Kong, could leave a hole for another buyer group to move in to. 

But, we have seen a co-ordinated slowing in transaction volumes across the developed markets at the start of 2019 and there are other bigger stories at play, which are shaping how capital is moving around the world and accessing commercial real estate.

Bill Hughes, Head of Real Assets, Legal & General Investment Management — Current Pause Is A Buying Opportunity

Wordsearch London's David Twohig, Imperial College's Neil Alford, Arup's Sowmya Parthasarathy, Heatherwick Studio's Paul Westwood and LGIM's Bill Hughes

Many occupational and investor decision makers in UK real estate will continue to defer decisions where they can, against the background of uncertainty. For those with long-term confidence in the UK, there are a growing number of opportunities presented as a result of less congestion around potential deals.

For some non-Sterling investors, the currency exchange rate has enhanced the appeal of the UK in terms of entry price. For investors able to act with conviction, the deferral until October represents an extended opportunity.

Most investors continue to believe in the UK as a long-term destination for capital, given the size and transparency of the market, alongside a belief in the UK to be able to adapt to changed conditions post-Brexit.
 
Robbie Taylor, Associate Partner, Dowley Turner Real Estate — Even Industrial Is Feeling The Effects

For occupiers and investors the uncertainty is far from ideal and the malaise of 2019 is expected to continue, and so volumes for both leasing and investment will be down year on year across all sectors. Although the Brexit delay has taken some of the steam out of industrial, which may not necessarily have been a bad thing, there is very limited evidence of yields weakening to date and we expect there will be a strong end to the year on the investment front given the pent-up demand with large volumes of cash seeking a home.
 
Having said that, the uncertainty means the market moves into the occupiers’ hands, for “big sheds” at least, with 17 units nationwide available in new speculative units above 200K SF — it would be a good time to be an occupier acquiring in that size range. In reality the delay will result in continued hesitancy from occupiers and unless there’s a pressing lease event, why make a decision? As a result, we think there will be a continued growth in third-party logistics provider activity as they soak up occupier demand through contractual agreements. Short term, we could see an increase in demand for existing (second-hand) property where terms of five years or less could be accommodated.
 
Ultimately, we must avoid everybody’s favourite word from the 2009 Global Financial Crisis, “contagion”, and it should be evaded as the market fundamentals remain strong — this isn’t 2008, it’s just a frustrating elongated speed bump in the cycle.

Allan Lockhart, Chief Executive, NewRiver Retail — Stockpiling Retailers Feel The Cost Of The Delay

NewRiver's Allan Lockhart

You could argue that the delay is not great for UK commercial real estate as the continuing uncertainty will only delay investment decisions for both investors and occupiers. In addition, developments are also likely to be deferred until developers have greater certainty on the future.

It will also impact occupiers. For certain retailers that have stockpiled, incurring significant costs, further delays and uncertainty are bound to be impactful. I think the same goes for industrial and manufacturing occupiers as that sector has already been impacted.

John Burns, Chief Executive, Derwent London — London Offices To Remain Robust

We have been surprised how well lettings for commercial office space in London have held up since the referendum in June 2016. It goes to show it is difficult to predict outcomes. Business does not like uncertainty but we have been developing and letting interesting space in good locations and people are still investing in London.

Roger Orf, Head of European Real Estate, Apollo Global Management — Short Term Bad, Long Term Fine

The Brexit process has negatively affected the UK economy and real estate activity, and additional uncertainty surrounding the outcome has intensified. Over the short term, real estate activity is highly dependent on Brexit outcomes. Over the long term (10 years), it matters less. Concern over another election and/or a hard Brexit leads one to delay investment decisions until there is more clarity.

Robert Wolstenholme, Founder And CEO, Trilogy Real Estate — Investors Will Lose Patience And Start To Do Deals

The outcome of Theresa May’s talks in Brussels will do nothing to alleviate the sense that we are “on ice” in the commercial property world. 

As far as investors are concerned, those with ready cash who have been hoping that Brexit Britain will provide a wealth of property bargains will continue to be frustrated. There is neither going to be a shakeout as the result of a hard Brexit nor is there enough clarity over the future to gain strong conviction with any particular strategy or sector. 

Those sitting on cash will start to lose patience. Cash is doing nothing for them in the bank and, whilst the UK has its issues, Europe, USA and the Far East are all expensive and seem to be long overdue some kind of correction. So investors will cautiously place their money but they will look to core and core plus investments with income security which on a relative basis to other countries and investment sectors seem reasonable.

While the cranes finishing off developments commenced pre-2016 remain, future supply is where the Gordian Knot of Brexit is having its most interesting impact for those investors with patience. It is becoming increasingly difficult to fund speculative development, and I don’t envy anybody seeking a large-scale fixed price contract in order to break ground with a major project right now. This points to a serious lack of supply in two to three years’ time. 

Assuming some kind of resolution can be reached in the next 12 to 18 months, likely to be a fudged soft Brexit, I believe we could be due an interesting bounce in office rental growth. So if you’re brave and have cash, it could be a good moment to be starting on site, as you could be delivering into an supply starved market which is hungry for the new.