MIPIM UK NEWS: Panic struck on 4 July. Standard Life had suspended trading in its property fund. Aviva and M&G soon followed. By the end of the week, seven retail funds were closed with no indication of when they might reopen.
“Brexit-led uncertainty” was thrown around to explain why funds were worried they could not handle the sheer volume of requests from investors to withdraw their money. To those watching the implication was clear: to cope, funds would have to sell their assets and sell them fast. Values would plummet and, as one investor said in mid-July, UK commercial real estate was “going to hell in a handbasket”.
Want to know more about the impact of Brexit? Don’t miss the EG debate Finance: lending practices in post-Brexit UK and what it means for development today (Wednesday 19 October) at 2pm in the Red Room. Click here for the full round-up of debates hosted by EG this year
Sure enough, Aberdeen Asset Management sold an office building on 10 Hammersmith Grove, W6 – valued at £100m – for £89m. The handbasket-to-hell had tightened its grip on commercial property and was on its way down with an 11% discount. Few guessed that two months later, investors would be looking at those weeks in early July as a blip.
Fast forward to September and China Minsheng has bought an office at 41 Tower Hill, EC3, for £84.5m from Société Générale. It is the Hong Kong-based investor’s first step into the City and it paid less than 1% under the asking price of £85m.
Rasheed Hassan, director of cross-border investment at Savills, which advised Société Générale, says the deal is indicative of the mood in London now. There is no shortage of overseas investors looking at capital even though prices have not fallen as much as the 10 Hammersmith Grove sale suggested they would.
“It’s not even business as usual for my team,” Hassan says. “It is an uptick in business post-Brexit. We have more enquiries from overseas today than we have ever had and we started getting calls the day of Brexit.”
Private equity and sovereign wealth funds, especially from the US and the Far East, have piled into London because they can afford to ignore short-term volatility, Hassan says, and take a view in which London’s clout as a global financial city is not going anywhere.
He says: “Sovereign and private investors take a super-long view on things. They say: ‘Look, I want to buy London because London, long-term, is great. I don’t want to get in and out in the next three years, and I’m not answerable to business plans that are under scrutiny from a whole investment committee.’”
And so a string of deals ranging from portfolios to retail and offices took off across the capital after the referendum vote.
Davidson Kempner beat fellow US private equity firm Centerbridge in the race to buy Blackstone’s £500m NCP car park portfolio; 63 Queen Victoria Street, EC4, went to Singaporean developer Hoi Hup for about £34m; and Hong Kong’s Wheelock Properties bought its first London office in a £120m deal with Standard Life over 23 King Street, SW1. Standard Life sold the building, which it bought in 2010 for £44.5m, at a considerable profit, defying the fears of another 10 Hammersmith Grove.
For these investors, the opportunities post-Brexit were obvious. Headlines declaring the pound to be at a 31-year low against the dollar in July signalled a buying opportunity. Hassan says his team did not see any Brexit clauses enacted from Asian investors; on the contrary, Hong Kong’s YT Realty, which was in the process of closing a deal on the Travelodge on Liverpool Street during the referendum, could suddenly get a 15% discount through the pound’s devaluation regardless of how the price fluctuated.
Overseas investors do not doubt the city will continue as one of the globe’s great financial centres, says Anna Cartwright, a private equity lawyer at Jones Day.
“There’s an infrastructure, there’s a financial services industry, there’s the rule of law and the English language. Trophy assets don’t have the same cache in Frankfurt as they do in London,” she says. “It’s very hard for European cities to compete in a meaningful way.”
In fact, depending on how the UK negotiates its exit from the EU, London could benefit. Passporting – whether companies can come to London post-Brexit and have access to the rest of the EU market as they do now – is unlikely to become a problem if the UK’s financial regulations post-Brexit are adapted from current EU ones. Moreover, with the EU expanding its investment regulations through Basel IV and PRIIPS, Cartwright suggests the UK could become more attractive for those looking to escape a strongly regulated market.
Cartwright says: “There is every potential that we can have our cake and eat it, if we can have the key financial services regulation that we retain be equivalent to EU financial services regulation, while also being able to have a regulatory structure that enables us to have a light-touch approach for investors that come from America or Canada. What will be difficult is the conflict between the two.”
While the long-term potential of the capital was apparent to some overseas, there was no lack of nervousness on the ground.
John Shelton, head of investment at Workspace, says: “Over the summer, there was a definite sense of ‘what is going on?’ We were in a period of price discovery. What the hell is a building let to Facebook for 20 years worth now? I don’t know.”
Independent valuers had no way of knowing what the price of buildings was in the aftermath of the referendum. Political uncertainty before Theresa May succeeded David Cameron as prime minister combined with rumours of interest rate changes from the Bank of England made the future impossible to predict. Where would the UK be in a year, or five years? With few answers, the industry went on its summer holiday wondering how things would look when everyone got back to work in September.
Norway’s Global Government Pension Fund, the biggest sovereign wealth fund in the world, went as far as to cut the value of its UK property portfolio by 5% in August, saying that the external valuers could not adjust it accurately following the uncertainty of the Brexit vote.
Where numbers did emerge early on, they were disheartening. Commercial property values were down 3.3% in July according to CBRE’s UK monthly index. City offices were hardest hit with a 6.1% fall. These were the biggest losses the industry had seen since 2009.
Pan-European investors were particularly hesitant about the UK. Rob Wilkinson, chief executive of AEW Europe, said that although the company’s plan was to expand its share in the UK, those plans would be put on hold while it took stock of what was going on.
Alistair Calvert, managing director and head of investment at Gramercy, said the company had put one UK deal on hold following Brexit. Whether Gramercy will do any more business in the UK is still uncertain. “I’m not saying we won’t, but we have a significant bias against investing in the UK,” he says.
The uncertainty that has surrounded UK real estate is unlikely to go away any time soon while the government works up to triggering Article 50, allowing the two-year negotiations for the future of the UK and Europe to begin.
Shelton says that since the beginning of September, UK property has come to accept this and carry on as normal. “There’s an acceptance that uncertainty is the new norm. We’re all getting used to it now and people are feeling a lot more positive about it,” he says.
Peter Cosmetatos, chief executive of CREFC Europe, says that in the long-term, the UK financial sector’s exposure to commercial real estate is in a much better position than 10 years ago. Lenders are more cautious, loan-to-value levels are down by a third, while the Bank of England and Moody’s carry out stress tests to gauge banks’ resilience.
He says: “We were in a very flaky place in 2006. We had regulators who had fallen asleep, and risk managers who weren’t paying attention or weren’t being listened to. There was an enormous amount of leverage in the system.
“The financial sector in the UK is in a good place. We have a far, far higher degree of resilience now.”
However, Cartwright is quick to point out that it is far too early to tell where the industry is. Ask any investor where we are and they will tell you the same thing: ask me again in December.
How is commercial property affected and why?
Office: City offices have taken the brunt of Brexit panic after capital values fell by 6.1% in July. If financial services do start to leave the city, offices will be the first to be hit. That fear means empty space is less valuable now than it used to be. Forecasts say that rental values could fall by 12% in the City and 7% in the West End in the next two years.
Retail: In its half-year results, Capital & Regional reported a rise in activity since the EU referendum with operating profits up by 16%. People are still buying and will continue buying, undeterred by the 23 June vote. As Dan Norris, a partner at Hogan Lovells, says: “A lot of the sectors won’t be affected by Brexit. Do you think Westfield is panicking about its shopping centres? Don’t think so. Brexit isn’t going to worry it particularly.”
Industrial and logistics: UK propcos with industrial portfolios were the biggest winners post-referendum. With occupational demand largely domestic and unaffected by the UK’s position in Europe, companies such as Hansteen, Tritax and SEGRO made the biggest recoveries on the stock market. On 1 September, SEGRO was able to raise £325m for a pipeline of developments by issuing shares.
London’s biggest non-portfolio deals, June-August 2016
Debenhams
Address 334-348 Oxford Street, W1
Size 366,000 sq ft
Price £400m
Date 7 July 2016
Buyer Ramsbury Invest AB – Sweden
Seller British Land
33 Central
Address 33 King William Street, EC4
Size 227,000 sq ft
Price £300m
Date 18 July 2016
Buyer Wells Fargo – US
Seller HB Reavis
Sedley Place
Address 355-361 Oxford Street, W1
Size 59,000 sq ft
Price £124m
Date 15 July 2016
Buyer Norges Bank – Norway
Seller Aberdeen Asset Management
Intercontinental London O2
Address 1 Waterview Drive, SE10
Size 4,900 sq ft
Price £108m
Date 15 July 2016
Buyer Arora International Hotels – UK
Seller Queensgate Investments
Academy House
Address 161-167 Oxford Street, W1
Size 34,000 sq ft
Price £108m
Date 8 August 2016
Buyer Sports Direct
Seller Aviva Investors
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