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London’s real estate market stutters as Brexit kills dealmaking
[LONDON] Property investors cut or stopped purchases of commercial property in London this year as Brexit negotiations lurched from crisis to crisis.
Spending on UK offices, malls and warehouses plunged more than 40 per cent in the first two months of the year to 4.3 billion pounds (S$7.6 billion), according to research firm Property Data. With less than three weeks left before the UK's scheduled withdrawal from the European Union, buyers are watching to see if the attempts to prevent a chaotic no-deal withdrawal will succeed.
While the UK Parliament prepares to vote on Prime Minister Theresa May's latest Brexit proposal, about 6,000 UK real estate professionals will gather on Tuesday for the annual MIPIM conference on the French Riviera. In previous years, this was typically a flurry of deal-making, but this year's gathering in Cannes will be held under a cloud of uncertainty.
"I don't think there are too many investment committees out there who want to commit a large amount of capital when there is a belief that within 30 days all will be clear," Andrea Orlandi, a managing director in charge of European real estate for the Canada Pension Plan Investment Board, said in an interview.
The wait-and-see attitude has translated into reduced sales and delayed leases. Purchases of City of London offices were almost a third lower than the five-year average in the first two months of the year, according to Savills Plc. Leases for space in the financial district dropped 42 per cent in January from a year earlier, the broker's data show.
"Turnover has been significantly down," said Stephen Down, head of central London investments at Savills. "Although the first quarter tends to be quieter, the impact of Brexit is playing into the market."
Even if Parliament approves May's deal, rents for the best buildings in London's main financial district will probably drop by 4 per cent this year because the political turmoil has already taken a toll, according to asset manager DWS Group GmbH.
Real-estate funds have also taken a hit. Investors have pulled 1.1 billion pounds out of these funds since October, according to Calastone. Redemptions are now taking place at a faster pace than in the aftermath of the June 2016 Brexit referendum.
Yet while UK transactions decline, investors have continued to pour money into other European capitals, pushing prices to record levels. Yields on the best office buildings in Berlin are now about 3 per cent, making them substantially more expensive than those in London. If lawmakers deliver a Brexit deal, that gap could start to look very attractive to global investors.
"I don't think there is any shortage of capital," said Julian Agnew, UK chief investment officer for LaSalle Investment Management Inc. "One way or the other there should be more activity once we have clarity, whatever the outcome."