Six months on from the UK’s decision to leave the European Union, “Brexit” is still dominating every discussion about UK real estate. The perception at the annual ULI UK Capital Markets Roundtable was that while the UK, and London in particular, will remain a safe haven for global capital in the long term, over the short-to-medium term real estate is in for a painful period.
There is still only minimal clarity as to how and when Brexit will be undertaken. But the economic impact it is having, in the form of solid GDP growth but a plunging pound, and the effects on the real estate market, are starting to become a little clearer.
25 of Europe’s top real estate investors, lenders, market analysts and advisers provided their insights into the latest sector trends at the ULI UK Capital Markets Forum in early November. Issues including debt, international investment, interest rates and the regions were discussed.
For London, there was a consensus that demand for offices would slow, especially in the City but in the long term, London will retain its position as a big draw for global capital. As one participant noted “If you’re investing for eight to 10 years then London is fine. Long term it maintains its position, in the meantime it’s an annoyance that we have to get through.”
In terms of the debt market, the effect of Brexit has not been seismic for debt secured against core assets. “If anything, there is even more debt for core assets with a good covenant.” Although for some banks, particularly those from Germany, the UK has been “rerated” as higher risk and the maximum LTV that can be lent has reduced by 5-10%. There has been a chilling effect on debt for value-add deals and development.
Overall, Europe and the UK remain markets where there are very few macro bets or overarching theses that can be put in place with a high certainty of success.
“The next 12 months is a needle in a haystack market – I don’t see broad swathes of opportunity in any particular market. Buying vs selling, over the last 12 months we have sold more than $1bn and acquired about half as much and that trend will likely continue.”
Earlier in the year a similar, candid, roundtable discussion took place to discuss residential investment. Availability of land was viewed to be a perennial issue but participants agreed that sites were coming forward at a reasonable pace. There was some frustration about delays around accessing public sector land and the often-protracted approach taken by the public sector to find partners.
Discussing the challenge of establishing a professional rented sector in the UK, participants noted that Build to Rent presents the opportunity to engage with Local Authorities in a much more meaningful way. The faster absorption rate compared to for sale means that Build to Rent has enormous potential in regeneration areas or as part of a larger scheme, helping to create a sense of place and a real community more quickly.
It was noted that frequent changes to the regulatory framework are potentially off-putting for investors and concerns were also raised regarding the Mayor of London’s election promises around rent stabilisation or even the return of rent controls.
Overall the mood was optimistic, however, with one participant noting, “The one thing that’s always happened when we’ve had a strong house for sale, bear market is that rental has withered. There’s never been more interest, money, research or sites going on and we’ve been at the end of a long bull run. The market is not going to stay that high either. This is a real moment of opportunity.”
With thanks to our generous sponsors, Dentons and Eastdil Secured, who sponsored the ULI UK Capital Markets Forums.