Fears of commercial real estate crash recede but agents still warn of extended slowdown
Three months after the Brexit vote caused property shares to plunge and forced a series of funds in the sector to halt trading, the UK’s real estate market is slowly regaining confidence.
“This is a correction, not a crash,” says Mike Brown, chief executive of Prestbury, a property investment company. “This is a million miles away from the Lehman Brothers era.”
UK real estate investment trust shares fell by an average of 23 per cent on the day after the referendum, according to MSCI’s index of the sector, but have since regained half of that loss.
Meanwhile, of the eight property funds that halted trading in the face of mass redemption requests from investors, three have reopened their doors. Columbia Threadneedle’s £1.4bn UK fund resumed trading this week, saying that “informed reflection has settled the market”.
More than 80 investment deals have been agreed on central London buildings since the referendum, according to Stephen Down, head of central London at the property advisers Savills; in 80 per cent of transactions, the buyers were from overseas. Turnover of City of London buildings in the third quarter is on track to be about 10 per cent below the same period a year earlier, he said.
But while the market has found some reassurance since the Brexit vote — one agent said a mood of “euphoric relief” set in after the initial shock — there is an awareness that the worst may not be over.
“There is a lot of post-Brexit complacency around, with sterling recovering and economic indicators reversing their pre-referendum weakness, but … we are cautious on the economy and hence property markets,” said Mike Prew, an analyst at Jefferies.
Nick Leslau, chairman of Prestbury, said any slowdown was now “more likely to be a slow burn thing”.
His company expects rents to fall and vacancy rates to rise, but that the effects will be contained, given “proportionate” levels of new property development and bank lending.
Analysts at Deutsche Bank this week said they could see shares linked with London office holdings falling as much as 30 per cent in their gloomiest scenario, which involves substantial staff cuts in the London offices of banks. Among many unanswered questions on Brexit is whether financial services companies in London will lose so-called “passporting” rights to sell products into continental Europe.
Deutsche Bank downgraded stocks such as Derwent London, which develops office properties in fashionable areas such as Shoreditch and has itself reduced its rental growth expectations.
Capital values for London offices dropped more than 6 per cent in July, according to CBRE, but then fell just 0.8 per cent in August.
Muddying the waters is a sense that the property cycle had peaked, even before the referendum.
“Pricing has been easing off its high water mark since June 2015, and where we are seeing some inertia is where vendors are still holding out for last year’s pricing,” said Mr Down. “Something will have to give here, and I expect vendors will have to compromise the most.”
A property agent, who asked not to be named, said he believed pricing for individual property assets had fallen at least 15 per cent since last summer, but that vendors had withdrawn buildings from sale rather than agree to price cuts, masking the scale of the drop.
The fall in sterling has helped to compensate for the decline in demand, bringing new overseas investors into the market including China Minsheng, the Chinese bank. A property company it controls bought Société Générale’s London headquarters for £84.5m this month.
A private Thai investor also made their first London real estate purchase in the form of a £75m City office building, said James Beckham, a partner at Cushman & Wakefield.
Spreads between government bonds and property yields are at their widest since after Lehman Brothers’ collapse, offering rewards to brave investors, according to Knight Frank.
While the potential risks to London offices have been well publicised, Mr Brown said secondary property, which may be in less popular locations or on shorter leases, would act as more of a “proxy” for the fate of the broader economy.
In the capital, plans for a 1.4m sq ft skyscraper at 22 Bishopsgate are seen as a bellwether: the French insurer Axa, which is leading the project, is still considering whether to proceed.
Pierre Vaquier, head of Axa’s real estate assets division, said: “We are analysing the risk … We want to build a first class property in the City of London, for large companies, and then keep it for some time. That requires a certain level of returns.”
But he said Axa was still considering other property investments in the UK. “It’s not a black and white situation. We need to be more careful in our underwriting and we need to take on board some of the risks associated with Brexit.”