British landlords scope out office bargains as Brexit vote bites

[London] British landlords were bracing for a drop in commercial property values due to an exodus of tenants after Britain voted to exit the European Union. While property prices fell in sympathy with the glum market sentiment, most occupants stayed put.

This translated into bargains for savvy real estate companies looking to buy properties on the cheap and for investors who wanted to increase their stakes in landlords doing so.

UK Commercial Property Trust (UKCPT), which owns property across the UK, was keen on buying office space in South East England, said Will Fulton, a portfolio manager at Standard Life Investments. Standard Life manages UKCPT's real estate portfolio. "The immediate thought is everybody is looking for a bargain ... how much can I get off?," Mr Fulton said, adding that UKCPT was looking to buy offices valued at £30 million to £50 million (S$53 million to S$88.3 million).

UK commercial property values fell 2.8 per cent in July, their biggest slide since Mar 2009, according to data compiled by the widely tracked IPD real estate index. The declines were particularly pronounced in Central London.

Doubts have cropped up about whether the country's financial services industry - which employs over 2 million people - will continue serving clients across Europe if Brexit terms are unfavourable. If companies leave, jobs will move out of Britain, leaving empty office spaces.

Shares of UK office property owners including UKCPT were clobbered following the June 23 referendum, falling between 10-20 per cent in the first two trading days after the vote. Some have since recovered losses.

Still, despite the widespread concern, rents and leasing demand have stayed steady, and tenants have continued to provide landlords with stable incomes and the incentive to bulk up their portfolios in anticipation of better times.

Market rental values in July fell only 0.1 per cent, according to IPD.

British Land, one of London's biggest commercial landlords, said last month that it signed 17 long-term leases after the Brexit vote at rates higher than the estimated rental value.

SVM Asset Management said earlier this month that it had taken a position in British Land after the Brexit vote.

Third Avenue Real Estate Value Fund, which had a 7 per cent holding in UK REITs before Brexit, told Reuters last month its stake in such companies had risen to 13 per cent after the landmark vote and that it was looking to increase it to 15 per cent.

Land Securities Group Plc was an attractive stock to hold due to its long lease terms of over eight years on an average that Third Avenue said were among the longest leases offered anywhere in the world.

Commercial property value after Brexit could also get a leg up from an influx of new companies renting office spaces in Britain, according to a report by property consultant Savills Plc.

Legal and accountancy firms, for instance, could take up more space as their workloads increase after Brexit, as could trade and policy lobbyists looking to move back to the UK, according to the report. "I think that pricing represents a buying opportunity in a world where most other developed real estate markets trade at premiums," said Scott Crowe, chief investment strategist at CenterSquare Investment Management.

CenterSquare, the property arm of BNY Mellon, has been buying shares of attractively valued office REITs, Crowe said, but declined to give details.

REUTERS