On the day the UK voted to leave the EU, I reiterated the view I have held all along: that the UK will remain attractive to real estate investors in the long term, regardless of EU membership.
I also braced for short-term volatility and for some investors to put a halt on decisions until the uncertainty started to wane.
The latter came to fruition within a matter of days, with the freezing of several property funds and the cancelling of a number of high-profile transactions such as Evershed’s purchase of 1 Wood Street in the City. This knee-jerk reaction that followed the vote was not that surprising, nor was it a proof point for the overall outlook for UK real estate.
Indeed, in recent weeks we have seen signs of the depth and stability of UK real estate as a destination for long-term investments. But I would now add a caveat to my original prediction. We’re starting to see discounts of around 5% on average with divergences depending on regional and sector bias. While Brexit has not significantly harmed UK real estate in absolute terms over the long term, it does seem to be driving dislocations that could be exploited by
savvy investors. To paraphrase Donald Rumsfeld, I’m calling these the ‘knowns’ and ‘known unknowns’.
We know there is an established ‘ripple effect’ out of London and that the regions look attractive for many tenants on a relative basis. This trend looks set to continue post Brexit. Two weeks ago, Freshfields exchanged contracts on an 80,000 sq ft office in Salford to house much of its back-office operations. Meanwhile, in the industrial space, Midlands rents have just exceeded all-time highs, according to Knight Frank. Plainly, trends such as the rise of ecommerce are largely unaffected by Brexit.
Concern was raised over overseas investors’ attitudes towards UK real estate in the wake of the Brexit vote. It’s now clear that many see the weaker pound and the underlying strength of the economy as giving rise to buying opportunities, as shown by a string of deals since Wells Fargo’s purchase of a £300m office.
The great ‘known unknown’ stalking the market is the impact of Brexit on the City of London. Many financial institutions are already battling with structural challenges such as automation: they now have the potential impact of a loss in UK passporting rights to consider. Brokers currently expect pricing to fall by up to 15%, which would be a notable drop relative to the wider market.
At these levels, we would most certainly recognise a buying opportunity. In today’s competitive and increasingly disruptive economy, large corporations are working hard to create productive and flexible working environments. However, well-located national and international headquarters are also important for meeting with clients, partners and investors. If financial institutions start to retreat, the City could return to its historic roots as a broader-based centre for commerce and a home for tech companies, among others.
The full effects of Brexit are yet to be felt. And while UK real estate continues to look a resilient and attractive investment destination, the subsets of opportunity within the asset class have become more nuanced. Over the coming months, we’ll be watching the ‘known unknowns’ very closely.
Manish Chande is senior partner at Clearbell