How did Brexit play out for UK real estate in 2017?
The uncertainty around Brexit has loomed large over the UK’s real estate sector in 2017 but what effect has it really had on investment in the last 12 months?
Ever since the UK pressed the Brexit button, its real estate sector has been overshadowed by uncertainty – and among the doom-mongers, a significant amount of pessimism.
Yet as 2017 draws to a close and reality tempers speculation, investment volumes show actions have so far spoken louder than words. UK commercial transaction volumes are forecast to reach around £50 billion by the end of the year, according to JLL, a rise of more than 15 percent on 2016.
“Such strong performance in the face of continued political upheaval and economic uncertainty demonstrates a long-term investor commitment and confidence in the UK real estate market,” says Alistair Meadows, Head of Capital Markets in the UK with JLL. “That is especially true of international investors, which account for around half the total volumes across the country, and 80 percent or more of those in London.”
Investment into London’s office property has surged this year reaching £12.5 billion by the end of the third quarter, the strongest first nine months on record and 44 percent up on last year.
While the weak pound has helped international investors get a better deal for their money, their investment criteria remains stringent; a global gateway city with strong fundamentals. And that hasn’t changed, says Neil Prime, Head of Central London Markets Head of at JLL.
“Amid all the Brexit noise, negative political sentiment and pessimistic forecasts, there is some uncertainty but Central London office market fundamentals remain sound in terms of supply,” he says. “We are seeing new sources of occupier demand from life sciences and sustained activity from the technology, Media and Telecoms sector which will offset financial sector weakness.”
Global investors snap up assets
Interest in prime London assets has been particularly strong from Hong Kong and mainland Chinese investors. In 2017 nearly £1 of every £2 invested in London offices was from Hong Kong with food conglomerate Lee Kum Kee paying £1.3 billion for the Walkie Talkie building while Hong Kong-listed CC Land’s signed a £1.15 billion deal for the Leadenhall Building aka the Cheesegrater.
Interest from Hong Kong is unlikely to change substantially in the short term, Meadows believes. “The capital coming in from Hong Kong is a combination of private family money that is seeking to diversify and invest outside the territory, and mainland Chinese money that has been channeled through Hong Kong,” he outlines.
“While some capital controls have been introduced that will likely moderate the flow of capital from mainland China, suggesting volumes may be lower going forwards, we believe this trend is set to continue.”
German investors have also been active in the London market with the likes of Deutsche Asset Management, Union Investment and Deka Immobilien making significant acquisitions while Singapore’s sovereign wealth fund such as GIC, and Canadian pension funds such as CPPIB have all added to their UK holdings.
While traditional assets continue to hold their appeal, many investors are increasingly turning their attention to alternatives – a rapidly growing sector in the UK which is forecast to make up 30 percent of the commercial market by the end of 2017.
“We’re seeing both domestic and international investors looking at sectors such as retirement living, healthcare, student housing and build-to-rent as areas of investment opportunity that offer value, and prospectively sustainable and resilient income streams,” says Meadows.
The mix of opportunities and challenges
With Brexit very much an unfolding event, 2018, for now, brings many unanswered questions. “Political uncertainty remains the biggest threat,” says Meadows. “And there are some big question marks over how the Brexit negotiations will unfold, especially in relation to migration and skilled labor, which have a major impact on the UK’s construction and service industries.”
Despite more multinationals firming up plans for post-Brexit operations, the London office market remains resilient. “While there is continuing uncertainty about the flow of financial services jobs out of London, the extreme downside risk to Brexit related jobs is, we believe, overstated," says Prime.
“In the current environment, the market looks stable and while unlikely to deliver widespread growth, an increase in office rents is forecast to return from 2019. Office occupiers will seek flexibility, employees will seek the best places and location and asset choice selection will be key to investor performance.”
And while investment volumes may not match their 2017 growth of 15 percent or more next year, international investors are keeping a very close eye on the market. “The fact that long-term institutional global capital has continued to invest in the UK this year despite the uncertainty bodes well for the future,” Meadows concludes.