Marijana No Comments

Investing in commercial property: beware the Brexit clause?

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.

‘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.

Source: Property Week

Marijana No Comments

Pound falls to 20-month low – time for UK property investors to act?

Following the postponement of a crucial Brexit deal vote by the UK government, the pound has fallen close to its lowest value against the US dollar since April 2017 – and this creates a significant opportunity for international investors to buy UK real estate.

What’s happened?

On Monday 10th December, UK Prime Minister Theresa May cancelled a key vote in the House of Commons on the details of a Brexit deal, outlining the current terms of the country’s withdrawal from the European Union (EU).

The decision was taken after Mrs May admitted that the current deal on offer, one negotiated between her cabinet and EU leaders, “would be rejected by a significant margin” by MPs in Westminster. It means that she must now decide the best of course of action to take, with the UK scheduled to formally leave the EU on March 30th 2019.

Following this decision to postpone the vote, the pound fell to its lowest level against the US dollar for 20 months:

  • After markets closed, sterling was down almost two cents against the greenback, with the exchange rate hitting £1/$1.2562, close to its lowest level since April 2017
  • At £1/€1.059, the pound also fell 1% against the euro and reached its lowest rate since August 2018

What do international investors need to know?

Firstly, it’s important to consider the fundamental reasons for investing in real estate:

  • Long-term growth
  • A regular income from rental returns
  • Decisions based on supply and demand levels in key markets

Then, international investors looking at the UK property market should also remember:

  • Ongoing Brexit discussions does not change the fact that UK property is one of the strongest investments one can make globally
  • 340,000 new homes are needed each year until 2031 just to meet current demand
  • Demand for rental property will reach six million by 2025 – but just 100,000 purpose-built rental properties are currently in the delivery pipeline nationwide
  • Until this shortfall is addressed, property demand will remain extremely high in a sector of low supply

An immediate opportunity to buy UK property

With the pound experiencing a significant degree of volatility, it presents an unmissable opportunity for international investors to buy UK property now.

At Select Property Group, we’ve seen a number of investors in recent years use fluctuations in exchange rates to buy multiple properties, taking advantage of greater levels of affordability.

Strategically choosing to invest and enter the market now means investors give themselves the best opportunity to achieve higher returns in the long-term.

Source: Select Property

Marijana No Comments

‘Safe as houses’? Brexit looms over UK real estate market

Investors are ditching British real estate as Brexit uncertainty, rising interest rates and inflation erode house prices and office values in a market hurtling towards a potentially messy exit from the European Union.

Shorting real estate investment trust (REIT) stocks is gaining in popularity, as the government publishes plans to cope with any disruption if Britain and the EU can’t agree on the terms of its departure .

The list of the UK’s top 50 most shorted stocks is peppered with real estate names. They range from REITs Intu and NewRiver to housebuilders Crest Nicholson and McCarthy & Stone to the number one short, Travis Perkins, which sells building materials, Markit data shows.

Short interest data from FIS Astec Analytics shows REITs that concentrate on residential and office space have higher share-borrowing activity and costs – a measure of demand to borrow the shares in order to short them.

The short – net of borrowing costs – would have been lucrative. British REITs have underperformed their European counterparts by more than 20 percent since the referendum.

OFFICE EXODUS

Office real estate is also under pressures from Brexit. London offices now demand a hefty premium over those in Dublin, Paris, Frankfurt or Amsterdam, but a drop in London’s relevance as a financial centre is weighing on its market valuation.

Several banks are already moving part of their operations from London to cities like Dublin, Frankfurt, Paris, and Amsterdam after Brexit.

“People are clearly thinking that with Brexit there will be some movement to Dublin, and therefore why should London command a circa 50 percent premium on a per square foot basis,” said Henry Dixon, portfolio manager of the Undervalued Assets fund at Man GLG.

Fewer EU nationals working in the country will also lower demand for both residential and office space.

The second quarter saw the biggest drop in EU nationals working in Britain since records began. Net EU migration to Britain has fallen to its lowest since 2012.

Market pricing has already, to an extent, factored these pressures in.

“If London offices are being valued at 1500 pounds per square foot but [REITs are trading] at a 30 percent discount to net asset value,” Dixon said. “In many ways the market seems to be already valuing London as being akin to Dublin.”

Land Securities, which derives nearly half its capital value from offices in London’s City and West End, trades at a 30 percent discount to book value. But even that discount isn’t enough to attract investors.

HOUSING IN A “HOSTILE” ECONOMY

House prices have also been feeling the strain. They rose annual 3.0 percent across the United Kingdom as a whole compared with 3.5 percent in May, the weakest increase since August 2013, ONS figures showed.

“There’s a received wisdom that there is safety in these things because of the old ‘invest in bricks and mortar’ adage, but we just couldn’t disagree with that more right now,” said James Dowey, chief investment officer and chief economist at Neptune Investment Management.

“The domestic economy has been hugely supportive of the UK housing market for many years, but over the past couple of years it’s suddenly become really quite hostile,” he said.

London – where prices were pumped up post-crisis by global capital inflows and demand for safe assets – has seen the biggest decline in its house prices. They fell by 0.7 percent, the biggest fall since September 2009, during the global financial crisis.

The average discount versus original price is widening, properties are taking longer to sell, and the supply of “for sale” properties is creeping up, UBS analysts found.

About 46 percent of London’s 68,000 partly built homes have yet to find a buyer, the most ever, according to property market research firm Molior London.

To an extent, the downturn was coming even before the Brexit vote – but uncertainty has accelerated it.

“We have been negative on London residential for eight years,” said Rogier Quirijns, portfolio manager and head of European research at Cohen & Steers, the largest REIT investor globally.

London’s housing market is past the peak of its cycle, while real estate in European cities still offers around three years of growth, he argued. Quirijns invests in Berlin residential real estate as well as Madrid and Paris.

Rising inflation – in part a consequence of the pound’s devaluation after the referendum – is putting more pressure on UK real estate.

House prices in the top-end prime residential market of London have come down by 20 percent from the peak in 2014, Man Group’s Dixon estimated. While most of that has been in nominal terms, the rest will occur in real terms, as inflation erodes the real value of homes, he said.

The Bank of England’s rate rises, the first since the crisis, are also adding pressure to buyers, with mortgages becoming more expensive to pay off.

“IF THE BLOOD FLOWS IN THE STREETS”

Some investors see the potential for a big value play in real estate.

“If things really get bad, if rents drop, I could invest. If the blood flows in the streets, then I could go back in,” said Cohen & Steers’ Quirijns.

Man Group’s Dixon also said that for REITs, as for every stock he watches, the portfolio managers have a clear idea of a price at which the shares become “too cheap to ignore”.

The fact the stocks are widely shorted sets the foundation for a potentially strong rally if sentiment improves, as short sellers rapidly unwind their positions.

But in the meantime, investors can only wait and hope for more clarity as the formal exit draws nearer.

“We would have to see a good deal, a soft or relatively undisruptive Brexit, and then we would want to see some recovery in the economy [before investing],” said Neptune’s Dowey.

The catalyst for a recovery could come as early as October, when Britain and the EU might strike an exit deal.

But diplomats in Brussels on Tuesday said they expect leaders to have to hold an emergency summit in November instead, having missed the informal October deadline.

“I personally feel it’s going to go down to the eleventh hour,” Dowey said.

Source: Yahoo News UK