Talking about the ‘B’ word
Brexit and the effect on commercial property.
If you close your eyes and forget about Brexit, the commercial property market in the UK, in general, could look quite rosy, especially given its long run of growth since the financial crash of 2008.
No amount of crystal ball gazing and consulting with experts will provide the answer as to what form, or not, Brexit – now on the cards for as late as October 31 – will take.
The most likely form is one of ‘Deal after Delay’, says London-based research consultancy Capital Economics, with any impact being a short-term correction, not a crash.
The Tulip – sign of underlying confidence
A welcome dash of colour arrived this spring among the grey political Brexit headlines when the 305-metre skyscraper was approved by the City of London Corporation. The Tulip, together with its neighbour, The Gherkin, are owned by the Brazilian J Safra Group and designed by Foster + Partners.
The ‘gherkin on a stick’, as The Guardian calls The Tulip, is designed as a public cultural and educational attraction, and is part of a policy to enliven the City of London after working hours.
It may not be about leasing space, but it is a sign of the underlying confidence in the UK market, whatever form Brexit may or may not take, and the attraction of the UK as a place to invest given the market’s relative liquidity, and favourable regulatory and tax environment.
Savills records Central London investment market up 28% in Q1 2019
This confidence is also reflected in the latest figures supplied by Savills. The property agent revealed that commercial property investment in Central London (the City and West End) in Q1 2019 was up 28% on Q1 2018, at £3.2bn. This was slightly higher than the £3.14bn invested in Central London in Q1 2015, a year before the referendum to leave the EU.
US buyers were among the most active, said Savills, accounting for around 45% of the total. Deals included Citigroup’s acquisition of its EMEA headquarters at 25 Canada Square in Canary Wharf for around £1.1 bn.
The impact of Brexit across the UK – “past crashes have been far more disruptive”
London has long been a global capital, but even when looking at commercial property as a whole across the UK and across all sectors – including retail – any adjustment remains relatively mild, albeit with more of the pain felt in the short term. This is against a backdrop of the Chancellor of the Exchequer in the Spring Statement revising down GDP growth rates from 1.6% in 2019, to 1.2%.
“Past crashes have been far more disruptive, with property values dropping by over 40% after the financial crash [of 2008]” – Capital Economics
“In context, past crashes have been far more disruptive,” says Capital Economics, “with property values dropping by over 40% after the financial crisis [of 2008].”
Capital Economics has revised down the impact on capital value growth over the next two years (2019 and 2020) to -6% from -4%, but this is “largely because of worse than expected retail numbers”, the research consultancy added.
“The big picture is that the [possibility of a] no deal continues to have the potential to hit capital values relative to a weak baseline,” says Capital Economics.
“But while no deal is expected to bring more downside than the central view, it is unlikely to be as disruptive as previous crashes.”
Reflecting what was said at MIPIM 2019
Speaking at the MIPIM 2019 event, Mapping Out the Investment Landscape, sponsored by EG, Melanie Leech, Chief Executive Officer of the British Property Federation (BPF), said: “Short term uncertainty is there, but the long-term outlook is more positive than before. The UK will continue to be an attractive place to invest in the long term.”
“The UK will continue to be an attractive place to invest in the long term” – Melanie Leech, CEO, BPF
This followed a members’ survey by BPF and Grosvenor Britain & Ireland of the UK’s largest owners, developers and advisers which revealed that almost 60% of those polled believed that the UK leaving the European Union would be better (41%) or make no difference (16%) to the country’s economy over the next 10 to 20 year. This was even though 91% believed that leaving the European Union would be worse for the UK’s economy over the next 12 months.
Brexit is not the only risk to manage
What is certain is that Brexit is not the only risk to the UK property sector. Others include:
✔ The performance of the global economy
✔ New patterns of space usage and tenant demand
✔ Climate change
✔ Rise in populism, which in turn leads to protectionism
In the meantime, down at Paddy Power, the odds are 13/1 on avocados being the first food to be rationed in the UK because of a no-deal Brexit. What, no more avocado on toast for breakfast! This could be a real challenge.
The views in this article are the views of the author and do not necessarily reflect the views of Reed MIDEM.
By GEORGINA POWER
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