Brexit: receded uncertainty makes UK property looks competitively priced

The Conservatives’ decisive victory will prompt corporates to dust-off expansion plans and inspire domestic and international investors to deploy capital into the UK’s ‘attractively-priced’ market is the consensus view of the UK property market commentators.

In this second article, we collate some of the immediate UK property market reaction.

Stephen Clifton, head of commercial at Knight Frank, summed up the sentiment following Thursday’s decisive victory for Boris Johnson:

“Real estate decision-makers have long craved greater political certainty, and this morning, that is the headline they have woken up to. We expect this clearer direction for UK politics to empower corporates to dust off expansion plans, developers to commence new schemes, and investors at home, and abroad, to quickly buy into what now looks like a very attractively-priced real estate market.  2020 will therefore be a much more active year on all fronts, as the UK reconfirms its status as one of the world’s few truly global real estate markets.”

Capital Economics forecasts that the rebound in business investment, and a loosening in fiscal policy, will increase GDP growth from around 1.0% in 2020 to approximately 1.8% in 2021. “The rebound would be bigger if it wasn’t for the risk of a no-deal in December 2020,” Dales said.

Will Scoular, co-head of origination at Investec Structured Property Finance, said:

“Uncertainty will not though be eliminated as questions over the UK’s permanent trading relationship persist. Still the removal of some of the Brexit fog should help lift business investment, UK growth and with it, housing activity too,” he added. Indeed, the Conservatives’ manifesto commitment of building 300k new homes per annum by the mid-2020s will boost to housebuilders. Jefferies picks Persimmon and Berkeley as among the sector stocks likely to benefit.

Liam Bailey, global head of research at Knight Frank, said:

“Supply is likely to rise as political uncertainty recedes and private and public spending stimulate the UK economy. This will put downwards pressure on prices, however some vendors may expect a bounce in prices, which may create a stand-off between buyers and sellers as the market re-prices.”

Jon Neale, head of UK Research & Strategy at JLL, said:

“The resounding victory for Boris Johnson’s Conservatives in the UK election will provide business and the property industry with a degree of much needed certainty. It now looks as if the UK will definitely leave the EU at the end of January 2020, based on the Withdrawal Agreement renegotiated by the Prime Minister earlier this year. There is likely to be a bounce in activity in leasing and investment markets as investor and business confidence return.”

Guy Grainger, EMEA CEO at JLL, said:

“With 40% of carbon emissions coming from the built environment, the real estate industry will play a leading role in fighting the climate crisis, and has the expertise to help the new UK Government deliver its promise to lead the way. But our house is on fire, and the target of Net Zero Carbon by 2050 is not ambitious enough. All political parties and industries must work together and collaborate to ensure we take the necessary action before it’s too late.”

Brexit: Tory landslide to unlock pent-up demand for UK property

Boris Johnson’s landslide election victory last Thursday will lift investor sentiment, unleash pent-up demand for UK property and green-light previously shelved capex plans on existing portfolios by investors which have waited for uncertainty to recede.

In today’s two-part election market reaction special, Real Asset Insight examines the historic victory for the Conservatives and considers what it means for Brexit and UK property markets.

The Conservatives secured its biggest electoral victory since 1987, taking 365 seats – the largest majority since Tony Blair’s second New labour term in 2001. Jeremy Corbyn’s remodelled Labour party paid the price for taking an ambiguous position on the election’s defining issue – Brexit – and to their worst result since 1935.

The extent to which the demand-release translates into transaction activity in the short-term will depend on the size of the pricing expectation gap between buyers and sellers, according to Liam Bailey, global head of research at Knight Frank. However, the real Brexit complexity – in striking a new trade agreement with the EU – remains to be resolved which may limit the rebound in investment activity.  

The election result is expected to usher in a five-year period of greater political stability which will provide a fillip to investor confidence, business investment, a short-term boost to the GDP outlook. Sterling rallied sharply to $1.346, from $1.317 immediately before the exit poll, before rising further on Friday morning to $1.35, its highest level against the US dollar since May 2018. Sterling also rallied to €1.207 against the euro, its highest level against the since December 2016.

The Conservatives’ 80-strong decisive majority significantly reduces – but does not entirely remove – the risk of a no-deal Brexit and ensures a pathway for Johnson’s Brexit deal to clear the House of Commons. This will conclude the end of the beginning of the UK’s protracted exit from the European Union by 31 January 2020.

Dr Walter Boettcher, chief economist at Colliers International, said:

“After three and a half years of political and regulatory uncertainty, which has eroded economic performance through lack of business confidence, we now have a modicum of certainty which should be enough for many businesses to begin investing in expansion.

“While the ink is certainly not dry on either the EU withdrawal agreement, or on the terms of the EU trade deal, the broad contours are generally understood and there is less concern about an acrimonious departure. Whether this proves sufficient for all investors only time will tell.

“Sterling has rebounded and will continue to rise back toward pre-Brexit levels as further milestones in the UK departure are reached. Hopefully, the new government will find the time and resolve to begin to push forward a long-delayed agenda for national economic renewal and the long-awaited push on infrastructure and regional development.”

More market reaction in today’s second story on the UK election.

London tops rankings for global fintech hubs

London has the most fintech headquarters of any city in the world, according to new research by Savills and its flexible office specialist, Workthere.

Data shows that London currently boasts over 1,000 global fintech headquarters with companies such as WorldPay, Finastra, Monzo and TransferWise among those choosing to base themselves here.  New York and San Francisco come in at second and third with 939 and 593 fintech headquarters respectively. Other cities ranked in the findings include Singapore, Paris, Beijing and Mumbai. 

The joint report from Savills and Workthere shows that London, New York and San Francisco are the clear epicentres of the fintech world making up a combined 38% of global fintech VC investment by volume so far this year. London topped the table for the number of FinTech VC deals for the first nine months of 2019 with 194, followed by New York at 164 and san Francisco at 123. When assessing deal volume, Workthere found that the rankings changed slightly with San Francisco on top, followed by London and New York respectively.  However, fintech investment is by no means limited to these three hubs with Paris, Berlin, Stockholm, Singapore, Atlanta, Boston, Palo Alto, Sao Paulo, Beijing and Toronto also seeing significant FinTech VC activity.

The research highlights that the flexibility associated with serviced and coworking spaces has lent itself well to the nature of fintech companies, which are growing quickly and therefore need agile spaces in which they can expand and contract in line with the needs of their business. As a result, a significant proportion of the fintech companies that received VC funding this year are based in this type of workspace. 

Cal Lee, global head of Workthere, explains:

“When comparing flexible office take up with FinTech venture capital investment, we are beginning to see a clear relationship between the two emerge for the London market, although this is currently less obvious for New York and San Francisco. This is echoed in the fact that in London, FinTech has accounted for 30% of all VC investment over the past five years, compared to 14% for both San Francisco and New York. Therefore, in London FinTech will be a greater driving force of overall flexible office demand.”

Matthew Fitzgerald, Savills Director of Cross Border Tenant Advisory EMEA, added:

“The tech sector as a whole has been a significant driver of conventional office take-up globally for a long time. However, fintech specifically is a relatively young sub-sector consisting of a high portion of startups. As these early-stage companies grow headcount and become more established over the coming years, we expect to see them making the move from flexible to conventional offices and then major occupiers in their own right, as we have seen in London. This journey will support the demand for this type of space, particularly in London, New York and San Francisco.”

“We also expect fintech companies to fill many senior positions by attracting talent from finance rather than tech, with all the workplace implications that come with it, as knowledge of finance in general and specifics about competitors will be hugely beneficial to some of these growing fintech companies.”

Cushman on 2020: climate change will affect valuation, leasing and investment markets

Climate change will affect valuation, leasing and investment markets, says Cushman, and an eventual downward repricing of higher-risk assets will be the market’s way of redirecting capital to locations and assets less exposed to climate risk.

For 2020, Cushman has identified three key environmental trends for real estate: new legislation, investor caution on environmental-related issues and the utilisation of data to help assess climate risk.

Andrew Phipps Head of EMEA Research & Insight, at Cushman & Wakefield explains:

“Legislators are still pressing the real estate industry: across Europe, we identified more than 1,500 national policies and measures at mitigating climate change in ways connected to real estate – and this will increase over the next decade. Energy consumption and energy supply made the majority (44%) of the reported policies, followed by transport (21%). Improving energy efficiency of buildings is among the main goals of these policies.

“Investors are still waiting for occupiers to confirm a strong demand for ‘green’ properties. Investment managers are increasingly aware that long-term profitability will suffer if they are not able to include climate risk in their pricing, but they do not necessarily understand climate risk well enough to accurately price in climate-oriented features. As with electric cars or organic vegetables, people want these and know they should have them – but they don’t necessarily want to pay for them.

“There is, however increasing evidence that corporate occupiers are willing to pay increased or premium rents for such assets. Investment managers are increasingly aware that, if they are not able to include climate risk in their pricing, this will probably have impacts on their portfolio as it could hurt the long-term profitability of their assets. But market players do not sufficiently understand climate risks enough to price them in today.

“Various technologies are emerging to help investors price properties with climate features more accurately. These tools analyse the vulnerability of assets to climate risks, as well as the impact of such risks on market value; data is then used to guide the programming, planning and costing of necessary mitigation work, alongside an estimate of the consequent financial impact.

“Investors will increase their interest in analysing climate change and related risk as this will affect the profitability of their portfolios. Above all, institutional investors with long term strategies, like Sovereign Wealth Funds (SWF) and state-owned banks.”

Non-listed real estate total expense ratios diverse across Europe and Asia

Non-listed real estate total expense ratios (TER) between Asia Pacific and Europe are diverging, new research by INREV and ANREV shows.

According to the INREV / ANREV Management Fees and Terms Comparison Study 2019, the average TER for non-listed real estate funds in Asia Pacific is 1.04% on a gross asset value basis (GAV) before performance fees, compared to 0.86% in Europe. The disparity also exists when TER is calculated on a net asset value (NAV) basis. 

The study identifies size as an important determining factor for TER. While larger vehicles (over €1 billion in value) have similar TERs on a GAV basis in both regions; medium sized funds (€500 million to €1 billion) reached 0.71% in Europe and 0.90% in Asia Pacific; small funds (less than €500 million) had the highest average TER by comparison and the biggest disparity between the two regions, at 1.07% in Europe and 1.67% in Asia Pacific.

Vehicle vintage is also significant. Younger vehicles tend to have higher TERs than older vintages. Funds launched in Europe and Asia Pacific before 2007 have an average TER of 0.77% and 0.54% based on GAV, versus those launched in the last five years which recorded average TERs of 1.34% and 1.64%, respectively. 

With respect to single sector performance, all traditional sector funds in Asia Pacific have smaller TERs than in Europe on both a GAV and NAV basis, before and after performance fees. For example, TERs based on GAV for industrial and logistics are 0.53% in Asia Pacific versus 0.84% in Europe – ahead of retail funds in both regions.

Despite differences elsewhere, funds split by structure are fairly similar across both Asia Pacific and Europe – with the average TER for open end funds on a GAV basis at 0.70% and 0.66% in Asia Pacific and Europe respectively. But there are more noticeable differences when looking at TERs for closed end funds. TERs before performance fees are higher for Asia Pacific, at 1.30% on a GAV basis compared with 1.18% for Europe.

Lonneke Löwik, INREV CEO, explains:

“These results are more pertinent than ever, given the increasing need for clarity on fees and costs. This detailed breakdown of TERs across Europe and Asia Pacific provides useful insight into the differences and similarities across regions and markets that will help inform investment decisions. It also reflects the efforts of INREV and the industry as a whole to exert downward pressure on fees; and adds to the consistent drive for greater transparency.”

Cushman on 2020: real estate not keeping pace with changing European demographics

the real estate sector to embrace the many stripes across the residential sector, but the industry is still not keeping pace, says Cushman & Wakefield.

The population aged 65+ has almost doubled in size over the last 40 years due to an increase in average lifespan, while the child population (0-14 years) has shrunk in relative size during the same period, according to data cited by Cushman. Within this, 55% of people now live in cities – a proportion expected to increase to two-thirds by 2050 – and single-person households are increasingly standard.

These trends are foreseen to continue, say Cushman, apart from the increase in the number of European citizens: The UN forecasts that, not only will the population of Europe peak in 2021, but it will continue to age. The proportion of the total population of those aged 65 years or above is projected to rise to 30% by 2100 whilst those aged 80 years or above will increase to 14%.

By 2030, projections indicate that London will join Moscow and Paris as the third European megacity with more than 10 million inhabitants. The trend in larger cities is only set to continue, with most major European cities set to grow further in size over the next decade.

The growing influx of people into cities will affect its infrastructure (public transport, public spaces, schools, hospitals) which has to evolve to face changing geo-demographics, says Cushman. In the short term, mobility will be a major threat. The advent of self-driving vehicles, improved public transport, e-scooters are all promised but the final impact on mobility remains unknown and seemingly always at ‘some’ point in the future.

Andrew Phipps Head of EMEA Research & Insight, at Cushman & Wakefield explains:

“Real estate is reacting to these changes by focusing on special senior housing complexes, luxury residential apartments, gated communities, and micro-apartment buildings for young people and business commuters. Retailers are attempting to make shopping more attractive for older people, while coworking, shared living and urban logistics spaces also hold out great opportunities.

“Developers and investors should also look to the development and regeneration of mixed-use schemes in dense urban centres – as well as adapting redundant assets (car parking, fuel stations, non-performing retail galleries) to new markets such as last mile logistics, click & collect, flexible office space and micro-living.

“The outcomes (so far) have been positive for both young and old. Benefits for the elderly included improved physical and mental health, while the children saw improvements to their language development, reading and social skills. There are further benefits in terms of tackling loneliness and isolation among the elderly residents.”

Cushman on 2020: liquidity in offices continues to shift out of town

Liquidity in non-Central Business District offices (CBD) across the EMEA region has surpassed the more traditional CBD office segment in the decade to 2018, according to data by Cushman & Wakefield, with the greater spread of activity driven by changes in behaviour, technology and economic life.

Transaction volume growth in non-CBD offices grew 255% across the EMEA region in the 10 years to 2018, compared to 174% for CBD offices, according to Cushman data, with non-CBD investments exceeding CBD in 2016 and continues to grow, while CBD volumes are slowing.

Andrew Phipps Head of EMEA Research & Insight, at Cushman & Wakefield explains:

“In early urban geographical models, the modern city was represented by a clear distinction between centre and periphery from a functional point of view. Cultural and political preferences, religion, economic relations and production techniques have contributed to a former distinction between the different functions of a city. This has resulted in previously fragmented cities, with monofunctional areas, based on the land values and transportation hubs. As such, in the post-industrial era, CBDs have emerged in most of the developed cities, in the heart of the city, where land values were the most expensive.

“Modern cities present a relatively spread landscape, with a strong (though ageing) CBD and diverse secondary office districts going towards the periphery. This has offered more opportunities in terms of a wider rental spectrum and new opportunities for developers. However, it has also contributed to congestion, higher vacancy rates in some areas, an unplanned feel to the overarching environment and increased challenges in attracting talented employees.

“Whilst the statement it’s ‘all about location’ remains key there are questions to be asked around the relativity this has to the expectations of a new workforce. This new workforce group seeks for an alternative work-life balance, now possible with new and remote technologies, collaboration and new ways of moving.

“As such, the old and traditional location of functions can be challenged. In an increasingly complex world, where the war of talent is becoming key, there is a need for designing new strategies to approach the location of the office function and to reimagine the future city.

“CBDs will continue to remain important as a central hub supporting decentralised activity, accelerating the trend towards developments with a high proportion of meeting and collaboration space. Workers will increasingly travel into the CBD for activities that require social interaction, team-working and face-to-face meetings – while potentially working locally in serviced office space, at home, or remotely.”

Asian investors set their sights on German debt investment market

The FAP Group, the independent German consulting firm for, said it has observed an uptick in appetite for German and European real estate debt investments.

At an event initiated by FAP Invest GmbH in Seoul, more than 40 South Korean and other Asian investors showed an interest in increasing their allocation in Europe’s ‘alternative’ real estate market, with real estate debt, is at the forefront. South Korean investors prefer mezzanine loans because of the return on investment, according to FAP’s recent findings.

Hanno Kowalski, Managing Director of FAP Invest GmbH explains:

“Asian investors, especially Korean investors, are increasingly looking for real estate debt investments. With our event, we not only provided investors with abstract information about the market, but, using case studies and live investment possibilities, also showed them concrete investment opportunities. Investments in Europe are supported by a positive currency hedge (won to euro). This allows investors to leverage the return on investment again. Within Europe, Germany plays the most important role as a ‘safe haven’. The interest is very high.”

According to FAP findings, Asian investors provide large-volume capital for investments in real estate debt, usually from €30 million per deal, whereby €200 million per deal and more have also been invested. According to FAP research, the interest rate expectations are in the mid-single digit range, also for developments.

Hanno Kowalski added:

“Investors from Asia have recently experienced problems with development mezzanines abroad. Thus, investors are currently – i.e. temporarily and not fundamentally – focusing more on mezzanine for portfolio financing with a current cash flow when making a selection.”

In October, a survey by FAP showed that office and residential mezzanine financing remain top of the popularity sector rankings among German lenders in 2019. Student housing and co-living also increased in popularity, while hotels and boarding houses drop slightly. Losses were also recorded in retail, shopping centres and the logistics sector. The office and residential sectors are also considered safe havens when it comes to financing project developments.

FAP’s mezzanine survey – consisted of 53 of the current 146 investors active lenders –depicted an agile, flexible and stable market for subordinated financing in Germany.

Dutch residential investment volumes to reach €9.3 billion in 2019

Investment volumes in Dutch residential market is expected to reach €9.3 billion in 2019, setting a new high watermark for the market, after 2018’s €8.5 billion annual haul, according to data from Capital Value.

Prices increased by approximately 7.5% in 2019, according to Capital Value, which added that interest from both domestic and international investors in Dutch residential rental properties remains strong.

International investors continue to play an important role in the calculation of the total transaction volume. This can be attributed to the purchase of Heimstaden in the Round Hill portfolio for €1.38 billion, which is the largest residential investment transaction in the Dutch market ever. This transaction increased the transaction volume by international investors to €4.2 billion, as was forecasted in Capital Value’s prognoses earlier this year. This amounts to 46% of the total volume, whereas in 2018, this amounted to just 36%.

Though the more than 9,500 homes at Round Hill went to Heimstaden, and in doing so, remained in the hands of an international investor, the number of international investors also grew in Dutch residential rental properties. In 2018, 30% of residential rental properties that were put up for sale by Dutch parties were bought by international investors. In 2019, this percentage is 36%.

The increased interest from abroad is also indicated by the number of active international investors in the Dutch residential investment market. This number increased from 35 in 2018 to 41 in 2019. An important reason for this increase is that many foreign pension funds want to invest in Dutch residential rental properties due to the economic stability and the positive forecasts with regard to population growth and the growth in the number of households.

A total of more than 47,000 residential rental homes were sold in 2019. Approximately 33% of those were newly built which totals to 16,000 residential rental homes. Last year, this percentage was 43% when approximately 20,000 new residential rental homes were sold. Dutch pension funds remain the most important investors in new-build output.

The most important cause for the lower number of newly-built residential homes as compared to 2018 is the rise in construction costs and the fall in the number of issued building permits, as well as the slowdown in building projects due to various factors such the nitrogen oxide pollution crisis and capacity shortages in municipalities.

The number of issued building permits is expected to reach approximately 47,000 this year. This number is 37% lower than the governmental objective of 75,000 building permits per year. In order to stimulate the number of building permits, more must be done at the municipal level to accelerate procedures.

Marijn Snijders, director of Capital Value:

“A record amount of pension fund capital is available for investment in Dutch residential properties. Dutch pension funds have indicated to have approximately 4 billion euros available for investment in Dutch residential rental properties. Of this amount, 1.5 billion euros remain unused. It is a missed opportunity if we do not use this available capital. Only an increase in supply can contribute to solving the increasing shortage and rising price increases of Dutch residential rental homes.”

Cushman on 2020: private equity could be the leading source of capital for high yield assets next year

Private equity will be the leading source of capital for high yield assets in 2020 and non-CBD offices will be top of their buying list, according to a Cushman & Wakefield forecast.

Funds have been the main culprit for lower investment volumes in recent years, Cushman says, as their share of high-yield investment dropped from a 10-year average of 54% to 37% in the first half of 2019. This fall leaves private equity volumes at near parity with those of funds for the first time since 2008.

The fall in fund activity and the relative stability of private equity investment will have an influence over what assets will be popular in 2020. If these trends and preferences persist, private equity would be the leading source of capital for high yield assets in 2020 and non-CBD offices would be top of their buying list, predicts Cushman.

By H1 2019, private equity spent 58% of its capital on non-CBD offices, with retail warehouses and shopping centres a distant second and third with around a 12% share each, according to Cushman data. Meanwhile, funds have shown a greater preference for retail, which attracted a 43% share of their investment, versus 39% for offices. Industrial has suffered from a lack of high-yielding stock since investors pushed yields lower.

In the UK, there were just 40 assets offering yields of seven percent and above on the market at the end of August 2019. Over half of this stock were offices and around 20% were retail properties. This supply profile is in line with private equity investors’ preferences but could be a barrier to funds looking for suitable retail assets.

Andrew Phipps, Head of EMEA Research at Cushman & Wakefield, explains:

“Yields will remain near historical lows. Economic growth and investment returns will slow. There will be a lot of capital chasing too few opportunities, and that competition could drive investors into pushing yields lower. For investors in core real estate, this stage of the cycle is the time to reduce risk and accept lower returns. But investors with a higher risk appetite may not want to settle for low income returns. There are properties for sale with higher yields, and there is a peer group of investors willing to buy them. However, any asset with a high yield comes with risks that need to be understood.

“Investors will apply a heavy discount to the value of properties that have tenants with weak credit ratings, short leases and poor building quality. And so, a higher income return compensates for these risks. Buyers of high-risk properties, therefore, must be comfortable with the tenant’s ability to pay the rent over the holding period. The investor may use relatively cheap finance to leverage this income and boost returns, but otherwise the strategy is often basic.

“Other investors will try to improve the asset. The spread between low-risk and high-risk yields is wide and, although there isn’t a magic trick to turn the worst building into the best, actively improving a property in this environment can be profitable.”