For Walter Boettcher, chief economist at Colliers International, the landslide win for the Conservatives in the General Election “has closed one door of Brexit uncertainty, but immediately opened another”.
Yes, he acknowledges, the UK now looks set to leave the EU in January. But whether the country can exit the transitional period at the end of the year with a new trade deal in place is much less clear.
For some property investors, the limited stability might be enough cause for cheer.
“For real estate investors interested primarily in UK tax and regulatory stability, the election result and strong electoral mandate itself may be sufficient to justify a renewal of investment confidence,” Boettcher says.
“The threats of a new radical regulatory agenda have evaporated. If there are regulatory changes to come, they look to be biased in the direction of fewer regulations with greater alignment to UK-specific interests.
“For those real estate investors who have greater concern about the EU connection of their prospective tenant bases, the calculation of risk will differ. Understanding their confidence awaits their response to the January push through the first stages of the UK’s EU exit.”
EG caught up with Boettcher and his Colliers colleague John Knowles, the head of national capital markets, to discuss the trends that shaped dealmaking in 2019 and their expectations for the year ahead.
Pent-up demand
The past year was defined by a market largely in limbo. “The occupational market stalled,” Knowles says. “Companies said: ‘do I sign up to a new prelet? I think I’ll wait’. So there’s loads of pent-up demand in the occupier space, but no development is happening. One, because funders and investors were unhappy about the lack of occupiers committing to things. Secondly, because the fall in sterling meant the build cost went up by 20%.”
The failure to have Brexit completed by 29 March “pretty much scuppered the year” in terms of strong property investment, Boettcher says.
“Having said that, despite the ongoing uncertainty, volumes have held up reasonably,” he adds. “I hate to use a hackneyed phrase, but the global weight of capital just continues unabated and there’s demographic reasons for that globally, which would suggest that that environment will exist for at least another decade.”
The ups and downs of the foreign exchange markets kept many buyers wary. “That really changed the dynamics over the course of the year,” Boettcher says. “There were a lot of people that, when [the pound] was down around $1.20, were thinking ‘maybe we should come into this’, but they didn’t. I went out on a tour, as far as Japan, trying to persuade people that now was the time to invest, because there’s only one way for sterling, and that was up – and it has gone up.”
A rise in the pound under the Conservative government could now take “a little bit of the lustre” off UK property, Boettcher adds, with the trade-off being greater security. “That may be enough for a lot of the long-term investors that aren’t worried about that extra five or 10% that they might pull out of [an asset] over the course of their investment horizon.”
A shifting of the mantra
In terms of the deals that were done, Boettcher points to the continued rise of alternatives as a notable characteristic of 2019, highlighting student housing and co-living, and predicting that alternatives could have accounted for as much as 45% of commercial property investment in the UK over the course of the year.
In the regions, everything and nothing appears to have changed. Boettcher says his own number crunching suggests that between 2002 and 2006, and 2014 and 2018 – “which I considered to be similar segments of different cycles” – regional property investment as a total percentage of all UK investment hardly budged.
“But what has changed hugely is the investor class,” he adds. “You get the internationals, the cross-border guys, all over the regions now, whereas back in 2004, 2006, they certainly weren’t there, other than maybe a few of the German funds.”
Knowles is hopeful of a strong start to 2020. Although some dealmakers pushed through purchases even during a turbulent 2019 – reasoning, in Knowles’ words, “if madness is the new normal, then I’m going to have to get on and do stuff” – many more chose to line up deals for early 2020, ready to take the plunge once the election outcome was known.
He also expects more in alternatives, and to look for buyers building out broader platforms in areas as varied as life sciences, hotels and student housing.
“In the UK for a long, long time, you bought industrial for income, you bought retail for growth and you bought offices for trading,” Knowles says. “That was the mantra of most investors – institutional and overseas. And that’s shifted. People are saying: ‘I’ve got the opco elements of this real estate and I need to do something with that as well.’”
Stranger things
Although the “Spelthorne effect” of local authorities investing in commercial property has long been known, Knowles expects to see a greater focus this year on councils taking on regeneration projects to help flagging high streets.
“If you sit in London, it’s very easy to underestimate quite what the impact has been on some regional towns and cities [from the retail downturn],” Knowles says.
“We’ve got councils saying: ‘we can team up with this developer, we’ll compulsory purchase a few sites and we’ll put it back together’. We’re almost back in the sort of 1930s civic pride-type arena, which is the council acting as the core owner of the town centre rather than leaving it to a shopping centre developer – because they’ve all gone.”
In terms of international buyers, Knowles and Boettcher expect to see more interest in the UK from Singaporean real estate investment trusts in the coming year, with German funds also in the market for offices and maybe, just maybe, a new push into the UK from Japanese buyers.
As at many of their rival agencies, the Colliers team heads into the new year hopeful of a better period for deals than the one they leave behind. Knowles describes 2019 as “a slightly bizarre year” in which “lots of strange things have happened”. But showing an agent’s optimism, he adds: “Overseas investors that we talk to are phenomenally keen to invest in the UK.”
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