Brexit Begins: UK CRE investor sentiment buoyed by stable government and Brexit mispricing

Over the last six weeks, a global appetite for UK commercial real estate is apparent from investors across Asia, including Japan, and North America, but also from German investors, according to Dr Walter Boettcher, Colliers International’s chief economist. He explains:

“Some UK economic survey indicators also suggest a strengthening of business sentiment which may explain the Bank of England’s decision to leave the base rate unchanged. The economic outlook remains uncertain, with opinions varying widely.  Clearly, though, the onus is now on government policy to stoke the economy, should it be required.

“The prime minister continues to make positive noises about infrastructure investment and regional economic rebalancing, all good news for commercial real estate, but we await the March budget announcement to see if these result in concrete foundations Of course, Brexit still needs to be negotiated, hence its risk is not completely dispelled. However for the moment, commercial real estate investors seem content to begin positioning themselves for what looks, so far, like a potentially very interesting and active year.”

On the issue of EU-UK trade negations, Paul Dales, chief UK Economist at Capital Economic wrote he expects the eventual shape of the UK future relationship with the EU to be a more distant “Canada, plus, plus” type relationship with the EU. “While that will probably have a downward influence on the economy’s potential rate of growth, we doubt the drag will be as big as some others fear. What’s more, it may be cushioned or offset by developments unrelated to Brexit.

“We can say with some certainty that the process of negotiating the new relationship will be arduous, bumpy and will probably last all year, if not beyond. We think that the chances of either all aspects of a new relationship being agreed this year or none being agreed are both higher than most appreciate. But we think it is more likely that there is some kind of fudge that prevents a big step change in trading rules at the end of the year. That could be a piecemeal approach in which deals in some areas (goods) are agreed this year, but the status quo is maintained in other areas (services) until deals are agreed after 2020.”

William Matthews, Head of Commercial Research at Knight Frank, said: “Brexit day is symbolic for many reasons, but has limited direct impact for decision makers in commercial real estate. The bigger picture is that many businesses are restarting their UK expansion plans, and are doing so against a real shortage of new space in key cities. They will be hoping that developers continue to react to the rental growth resulting from this scenario, and in a way that supports the values that they, and their staff, place on sustainability. For their part, investors at home and abroad have long recognised the UK’s significant yield advantage compared to other highly liquid markets – their challenge, as before, is navigating the intensity of truly global competition.”

Damian Harrington, Head of EMEA Research at Colliers International, added: “Despite the challenges facing Europe in the past few years, the real estate market has maintained a healthy position from both an occupational and capital markets perspective. In 2019 office take-up across Europe, for example, was very much in-line with 2018 levels, and occupier conditions are still heavily weighted towards landlords. So despite slowing employment growth, a mixed macro outlook and a rather turgid beginning to the year, provisional European transaction volumes came in very close to their 2018 levels of €308 billion – only two per cent down. Capital values – at least outside of retail – continued to grow which has helped maintain the volume momentum. And all this, despite a 30 per cent drop-off in activity in the UK.

“Further across the region, we can expect more retail assets coming to the market, helping to make up for the dearth of new commercial real estate available or changing hands. We are also likely to see investors incorporate more operational real estate into their portfolios and make niche plays by sector, in order to drive returns and mitigate their risk. Ultimately, despite today being the day Britain officially leaves the European Union, it should be a good investment year for the continent, including some rebalancing of capital distribution back to the UK.” 

james.wallace@realassetmedia.com