Staff Shortages, Stockpiling And Sectors Defying Gravity: Here’s What The Brexit Talks Mean For Real Estate
No sooner had Theresa May come up with her plan for Brexit than senior ministers were resigning in protest.
The white paper drafted by 10 Downing Street outlining the potential relationship with the EU after the U.K.’s withdrawal in March next year has been called the worst of all worlds: too close to say Britain has truly left the EU, but a division that would cause huge upheaval.
Given the opposition, it is touch-and-go as to whether the white paper will ever become the government’s official policy. It does, however, provide some indication as to what the Prime Minister sees as the right strategy for Brexit.
So what does that mean for real estate in the U.K.? Bisnow checked in on the five sectors which are likely to be most impacted by Brexit. Some are proving resilient, some are being hit now, while others have big issues potentially coming down the tracks toward them.
Hotels And Hospitality — Healthy Now, But Staff Issues Loom
London and U.K. hotels had a good year in 2017, on both an occupational and investment level. Revenue per available room grew by 5% according to PwC, while U.K. investment volumes grew by 44% to £5.5B, with the sector underpinned by strong tourist growth driven partly by the fall in the value of the pound.
This year is not forecast to be as strong, with PwC predicting RevPAR growth of 0.6%, but things are far from negative.
“Following a record 2017 with favourable tailwinds from weaker sterling, 2018 hotel operating performance has seen a slight softening, partly due to colder weather around Easter and the currency benefits having passed through," Crosstree Real Estate principal Will Dear said. "However summer trading has been encouraging — we may be on a for a record July in London.”
“The hotel investment market has remained robust, particularly in central London due to scarcity of investment sales. There are several high quality London assets coming to market that appear to be attracting strong interest and pricing. To some extent investors see hotels as offering a Brexit hedge with a weakening sterling typically leading to improved top line operating performance.”
The big issue looming for the sector is staffing. The British Hospitality Association estimates that 12% of the workers in the U.K. hospitality sector are from the EU, and for the waiting profession the figure is 75%.
The white paper argues for free movement of skilled workers and some temporary workers, but sectors like hotels are likely to see big staff shortages if the government does stick to its word and implement stricter immigration targets.
“A significant proportion of hotel workers across the UK are EU nationals," Dear said. "Ongoing availability of high quality staff is likely to be a concern over the coming years. Hotels also rely to some degree on agency workers and there are signs that the numbers and quality of agency staff has reduced over the last eighteen months”.
Industrial And Logistics — Boosted By Stockpiling?
The industrial and logistics sector is one that has continued its bull run almost entirely oblivious to Brexit.
The sector experienced record investment volumes of £7.5B in 2017 and recorded a market-leading annual return of 20%. In markets around London, rents are starting to outpace those for retail warehouse schemes, given the insatiable demand from online retail for edge of town sites and the competition for land with housing.
“Rental growth in London and the South East has been at some of the strongest levels since the 1990s,” CBRE Global Investors Head of U.K. Research Andrew Angeli said. “Even with Brexit, London’s population is continuing to grow and we’re not building enough homes, which is putting pressure on land and so on industrial rents.
“Coupled with that, if you’re an investor and you’re priced out of London offices and you don’t want to invest in retail, where are you going to go?”
There is one potential knock-on consequence of the current plan for Brexit, which would see the U.K. come out of the customs union and thus have an effect on supply chains hit by potential tariffs and border delays: stockpiling. Angeli pointed out that around 70% of the U.K.’s food is imported which, if some of the more grave prognoses about increased border controls come to pass, could lead to a need to build up reserves.
“We’ve heard anecdotally that some grocers might be looking at maintaining stock levels in a world where borders are less easy to cross,” he said. “That would suggest perversely that in the event of a hard Brexit you could see demand for logistics increase as grocers need more space. We would expect this to trickle down to other sectors like automotive. Sectors that have previously relied on just in time delivery might also need more storage space.”
Offices — Defying Gravity
‘In spite of Brexit’ is a mantra that could be carved into the side of one of London’s skyscrapers.
London's office market is defying most of the predictions of gloom in the wake of the vote to leave the EU. First half leasing totals were strong, and there is a record amount of space under offer in London at the moment. Much of the occupier strength is being driven by flexible office take-up, but the fact that desk prices rose in this sector shows that there is not yet an oversupply here.
On the investment side in the City of London, property occupied by financial services saw a record quarterly volume in Q2, as Asian investors continue to show faith in the market.
“Supply is healthy: some people are nervous, but that is having the effect of putting a lid on supply,” City Property Association President David Ainsworth said. “It shows what a diverse occupier base London and the City have.”
The City of London Corp. called the Brexit white paper “a real blow for the U.K.’s financial and related professional services sector” given that it did not do enough to make sure that financial institutions will be able to continue to operate within the U.K. and the EU.
“It seems that the government is listening to different groups at different times, and at the moment it is not listening to services,” Ainsworth said. “The day-to-day noise is deafening, and we have to continue to push the case of the financial and services sector.”
Retail — The Government's Mind Elsewhere
Retail’s struggles hardly need reiterating — 2018 is likely to be a record year for retail failures and job losses. A lot of the issues facing the sector would have happened with or without Brexit — though it hasn’t exactly helped.
“With a lot of the long-term structural problems retail is facing, a transition period that might have taken up to a decade has been condensed into 18 months,” Ellandi Property Director Mark Robinson said.
Brexit hit consumer confidence at the worst possible time, he argued, and the fact that retailers had to face sharp increases in inflation in 2016 and 2017 due to the declining value of the pound caused prices to rise as confidence fell, exacerbating the impact.
CBRE GI’s Angeli pointed out that this rise in inflation, as well as increases in the cost of the imported goods retailers sell, has also caused the price of materials used for shop fit-outs to rise. Any retailers that were thinking of expanding might thus be caused to think again.
Robinson pointed out that Brexit has had another pernicious effect on retail: the government’s mind is elsewhere at a time of crisis.
“They just don’t have the bandwidth to take decisive action to help the companies and businesses affected, or to try to come up with a long-term strategy to take advantage of the changes that are happening. Brexit is taking up all of the attention of every department in government.”
It is a lament that every sector could make, but as Robinson points out, experts predict that more than 900,000 retail jobs could be lost in the short-to-medium. It needs the government’s full attention.
Student Housing — The Numbers Look Good
The student housing sector did receive a boost from Number 10’s Brexit white paper — students from the EU will have the ability to study in the U.K., although there is still no definitive answer to the question of whether students will be counted in the overall immigration figures.
It is a vital question given that more than 135,000 students come to the U.K. annually and there is a target of limiting net immigration to fewer than 100,000 people per year.
“There has been a bit of pause in the investment market recently, as people wait to see what the new world order looks like, but it is just a small pause really,” Arlington Managing Director Sean McKeown said.
Student housing investment volumes were £4B in 2017, according to Knight Frank, 25% up on the previous year.
“At the end of the day EU students make up around only 5% of students in the U.K. at the moment, and for every EU student that chooses not to come, there are 10 students from the Far East waiting to take their place. There is still a huge desire for English language higher education.”