Last month saw an apocalyptic picture painted about the impact of Brexit. The Bank of England warned that commercial property values could fall 48% in the event of a No-deal – worse than the global financial crisis – and even a more “orderly” Brexit could see a 27% drop.
The severity of the warning seemingly took many by surprise. However, the negotiations and the resulting wider economic uncertainty have been impacting commercial property valuations and tenant demand for some time.
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‘Brexit clauses’ have become a feature of commercial property valuations since the Referendum, stipulating that values can’t be guaranteed following the March deadline. But while previously, these clauses were typically buried in the “boilerplate” wording, now they’re front and centre, presenting a much bigger obstacle for institutional investors. Funds are increasingly sitting on their hands, with some suspending or aborting live deals, reluctant to gamble stakeholders’ money in a market with such a blind spot.
Silver linings, not Brexit blues
But this isn’t Armageddon. One person’s risk is another’s opportunity and the vacuum left by institutional investors has left the door open for cash-rich private or family office investors. With no institutional shareholders and often no short-term debt pressures to satisfy, they can take a longer-term view. They’re actively looking to price and pursue risk, especially (soon to be) vacant properties and will remain a force to be reckoned with in this period of Brexit limbo.
A simple reading of the Central Bank’s numbers also ignores the fundamentals underpinning UK real estate. The headlines might say differently, but our major cities continue to be buoyed by overseas capital. Over three-quarters of the £5.3bn spent on Central London office transactions in Q2 this year came from foreign buyers.
So before everyone pours freezing cold water on the market, we should remember that Sterling’s devaluation has ensured that UK real estate remains attractive. And, with investors now getting more bang for their buck, we’re arguably more appealing than other territories. Compared to many other competitor markets we have more transparent, real-time data available, alongside a mature professional infrastructure and easy access to finance to aid investment decisions.
There’s also the intangible: certain investors will always want to be in the UK and feel a sense of inherent security investing here. It may not feel like it now, but historically we are far more politically stable than many other countries and have a well-established rule of law. Depending on where you sit, these are key factors for investors’ wish lists.
Yes, Brexit presents significant challenges. It would be foolish to pretend otherwise. But it doesn’t have to be a perennial spectre. Some might argue that the uncertainty generated by a potential change of government at Westminster because of Brexit – rather than Brexit per se – is a bigger concern and would have a more significant impact on investment decisions. With continued resignations and reshufflings, no one can say for certain what will happen politically.
When the dust settles however, just as after every major disruption to the sector in the past 30 years, we’re likely to find that a number of risk-savvy, cash-rich operators have done well from the uncertainty and will be well-positioned for whatever the post-Brexit World throws at us.