UK deals down 40% as cross-border capital diminishes

The UK is a mixed market which is attracting a lot less foreign capital than usual as we approach the end of 2020, experts agreed at Real Asset Media’s Is the UK still OK? Covid-19, Brexit and the Property Markets briefing, which was held online this week.

“Capital market transactions are down 40% this year, which gives you an idea of how quiet life is,” said Stephanie McMahon, senior director, head of research, BNP Paribas Real Estate UK. “In Central London, office take-up is down 70% on last year. It’s a provisional figure but it shows where we are, even if the market will pick up towards the end of the year,” she said.

There is a mood of caution among investors across Europe and indeed the world. But now that cross-border capital is unable or unwilling to invest, the UK is paying the price for the dominant role that foreign investors have played.

“Markets are in risk-off mode in general, but the big difference between the UK and Germany or France is that in these two countries domestic capital is very active,” said Tony Brown, global head of real estate, M&G Real Estate.

Investment volumes in Germany are likely to be higher this year than in 2019, which is remarkable, and even in France record yields are being achieved for Paris CBD assets.

Limited cross-border capital currently entering UK

“That is a big contrast to the UK, where we’ve seen a lot less investor demand,” Brown said. “It is difficult to tell if it’s sentiment, Brexit or the practical impact of travel restrictions, but the reality is that there’s limited cross-border capital coming into the UK at the moment.”

There are advantages to the situation, he pointed out, as there is a lot less competition in the market and proactive investors can buy prime assets more easily.

There are big differences between the UK and its Continental peers but also within the UK itself.

“We see a very polarised, disaggregated market,” said Mark Haywood, partner, CMS. “Investment volumes are down some 35% on the ten-year average, but the industrial sector has never been stronger. A lot of what is on our desk now is industrial deals, anything from £50 to £500-600 million.”

The next priority for investors at the moment is the living sector, he said, from healthcare and student housing to regional PRS investments.

“An example is the four 64-storey Renaker towers in Manchester, with 1,500 apartments,” said Haywood. “It shows the level of interest in build to rent, but also the shift to regional cities. London has become more expensive and difficult to live in, while the regions have become a lot more attractive.”