The UK real estate investment market is set for a major drop in volumes this year in the wake of the Brexit referendum vote, but the European perspective is ‘pretty much undiminished’, according to Mark Ridley, CEO UK and Europe at London-based advisor Savills.
‘There is an element of uncertainty, but in the major cities and countries on the Continent, confidence levels are pretty strong. Some pan-European, US private equity and Asian investors are looking at the opportunities the current market presents. Some of this money will go into European cities so there will be a potential benefit there.’
Earlier this week, Cushman & Wakefield forecast that European real estate investment volumes would fall 6% this year, reflecting a massive drop of 25% for the UK and an increase of 10% for mainland Europe. Ridley conceded that the Brexit vote will ‘definitely’ lead to a pause in investment in the region, but added that volumes were already falling before the referendum. ‘There’s no doubt about it, the Brexit wote has definitely brought the summer forward. But an adjustment was already going on anyway because pricing had in some cases become quite tight.’
Despite the market upheaval since the referendum outcome, there is no parallel with the immediate post-GFC situation, Ridley said. ‘It feels very different. The market is not dead, there is not a complete freeze like there was during the banking crisis when everybody knew that it would be unfolding further and that there was only one way and that was down. Some deals are being renegotiated, but others are carrying on regardless. There’s still significant appetite from players who want to invest in the UK because it’s a strong destination.’
Some investors are looking at London with a view to singling out opportunities for re-pricing of assets, he added. ‘We’re seeing on the ground that an enormous amount of equity is floating around and targeting global cities. We still have to see what Brexit will mean for rental growth, but London remains attractive because of its transparency. It is still on the menu of international investors who take a long-term view.’
The dust has yet to settle
While some investors are holding off until the dust settles, for others it is business as usual, he said. ‘We’re seeing all sorts of variations. But there’s not much variation from investors requiring long-term annuity income, on that front we’re seeing very little change at all. The key is to work with established criteria in prime locations and long-term income.’
Short term, the UK institutional market may falter in the regions, Ridley noted. ‘Institutional investors will obviously become more hesitant so in the short term there may be a soft period for development and secondary assets. But the prospects for high-quality investment remain pretty much untouched in the long term.’
The situation differs from city to city and per sector, but on the whole occupier demand and the level of available space are in balance, Ridley said. ‘Vacancy levels are very low, there’s no oversupply. Occupier markets may become hesitant until the [UK government’s] direction of travel becomes clear. But companies that are hesitant about making a decision can only put things off for so long.’
After the political turbulence of the past few weeks, the dust may now settle following the change of guard at 10 Downing Street and the appointment of Theresa May as prime minister. A lot will depend on whether David Cameron’s successor strives to keep the UK in the common market, Ridley commented. ‘It all depends on how it unwinds and whether or not we can stay in the single market. We need to work through the process and find the best solution for the UK as a whole.
‘I would anticipate that if the direction of travel is to remain in the single market and that if the European Commission accepts that, confidence may return very quickly. The market would take comfort in that. But if that becomes an unlikely scenario, we may see more uncertainty for longer.’
At this stage, the impact of the Brexit vote still has to filter through into the excel sheets and data analyses, Ridley pointed out. ‘Investors are hungry for that data on capital markets and occupiers. But realistically, that data will not be available for at least another three months until early September.
‘The information needs to come through on occupier markets and how will it affect rental growth. But the most uncertain times offer the best opportunities and when even a semblance of certainty returns to the market, investors quickly adopt a different tack. To do well in this market, you do have to be somewhat brave or take a long-term view.’
