Business as usual for cross-border investment into the UK post-Brexit

In the days and weeks that followed the EU referendum there appeared to be a shift in the UK commercial property market, as some open-ended retail funds took measures to create liquidity and boost their cash reserves, and an opportunity for discounted acquisitions emerged.

As I write this, six weeks after the vote, that window of opportunity for investors to benefit from this situation in the UK has all but closed and we have returned to a relatively normalised market specifically for prime assets.

And why wouldn’t it? What has changed for the UK, and its investment market, apart from the decision to leave the EU?  Our time zone, currency, landlord-friendly leasing structures, English language and market transparency continue to exist.

The UK as a whole continues to be perceived as the most welcoming market in Europe, possibly globally, to overseas investors and those with long-term interests will continue to recognise the UK as economically, historically, legally, politically and socially safe.

Despite a lack of discount for prime assets, there is a perception of potential occupier uncertainty going forward in the market that could feed into a degree of discounting on secondary or tertiary assets that may appeal to opportunistic investors willing to move up the risk curve.

For non-sterling-denominated investors, any discounts that do exist will be further enhanced by the devaluation of the currency, which some groups are benchmarking at as much as 20%.

Since the referendum Savills has carried out extensive travel across Asia, the Middle East and US to find out where there is an appetite for cross-border investment into commercial property, and is currently in talks with over 100 international investors actively looking at London and the wider UK market.

Within that group we have everyone from highly opportunistic parties seeking unrealistic discounts through to first-time investors, for whom the currency movement alone has made London a realistic target for them and as a result we are seeing deals done by these groups at pre-Brexit pricing.

We may see an initial slowdown in parts of London’s office occupier market over the next 12 months as businesses sit tight. This could be coupled with a slowdown in development starts where construction contracts have not already been let due to a potentially different leasing and development financing environment.

However, this is only likely to create pent up demand going forward which could occur at a time when delivery of new buildings is squeezed. The result of this could be a rent spike or, at the very least, a downside protection on rental falls.

As a final word, one of the effects of the UK’s decision to leave the EU is lower interest rates. For the past six to 12 months a potential risk for investors into the UK was the prospect of rising interest rates.

We appear to have now moved into an environment of “lower for longer”, which has removed this specific risk and arguably will enhance the positive arbitrage between cost of finance and income yields for the time being.

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