Amid all the Brexit anxiety, overseas investor sentiment has cooled towards UK property. Undoubtedly some investors are keeping their powder dry before making significant commitments to the UK. While uncertainty persists, this is likely to remain the case.
Those still investing in the UK tend to choose pan-European funds, in which the UK is just one potential market. They are favouring diversity across geographies and avoiding sole UK exposure while our future outside the EU remains an unknown.
A number of UK-only managers have exited the market or merged with European counterparts. In 2017, Patrizia acquired Rockspring, subsuming the London branch within the pan-European manager, while UK manager Brockton recently sold a stake in its business to Alony Hetz Properties. Other managers may be considering similar options.
Some might think this retreat from the UK market reflects a lack of opportunity. The reality is quite the opposite. Pan-European funds play a role, but local managers are well placed to identify opportunities in the Brexit environment. Those with a more diluted focus could lose out on the best UK opportunities.
Naturally, there have been fears over London property given uncertainty about the future of the financial services industry – the capital’s dominant sector. But this caution also does not reflect the opportunity. The rental market remains active and supply and demand dynamics mean values are likely to remain stable.
Perhaps the biggest opportunity for investors is in refurbishment or redevelopment. UK managers are best positioned to undertake work to bring discounted properties up to scratch for new tenants.
Many may be spooked by Brexit, but UK property investments can still deliver returns for investors. UK managers have the required market knowledge and expertise to find opportunities amid the uncertainty.
Overseas investors are also increasingly seeking to invest in the regions, where managers with a sole UK focus are likely to have an advantage. The divergence between London and regional residential property markets is well documented, the divergence between London and regional commercial markets less so. This divergency reveals unique investment opportunities.
While we do not believe we will see a no-deal scenario, in the event of a no deal, London will be disproportionately affected by businesses reviewing costs and financial services firms possibly leaving the capital. But government support for the regions would help uphold property values there, to an extent encouraging overseas investors to invest in the regions.
The UK’s regions have vibrant business communities, with large student populations providing high-quality human capital, and infrastructure projects like HS2 attracting more businesses than before. The trend for businesses like Channel 4 setting up HQ offices in cities such as Leeds (pictured) will continue, offering UK managers with access to the best deals on the ground a unique opportunity. The exit of UK-only managers from the market is a shame, as opportunities in the UK abound.
Manish Chande is senior partner at Clearbell Capital