With less than a year to go, the risk of a hard Brexit is still on the horizon for the UK. So far there have been few signs that foreign investors are turning their back on Europe’s largest real estate investment market, but some believe the UK has ‘sliced off a big chunk of its competitive advantage’.
In mid-June it emerged that Paris-based Amundi, one of Europe’s largest asset managers, is refraining from buying across the Channel this year, a course it already pursued in 2017. ‘The link between economic recovery and rising rents is a key element to take into account, and countries such as the UK, which will bear the negative impact of Brexit, will be penalised,’ CEO Jean-Marc Coly said in a report published with data provider Preqin.
The UK has for years captured a disproportionate amount of global investment flows, but those days may be over post-Brexit, Simon Martin, head of research & strategy at Tristan Capital Partners, told a recent PropertyEU Investment Briefing in London. ‘You cannot ignore the fact that the UK has sliced off a big chunk of its competitive advantage, so it is much harder to make the case for being massively overweight in the UK, especially at a time when other European capitals are on the rise.’
UK not off-limits for foreign investors
That is not to say that the UK is now off-limits for foreign investors. On the contrary, foreign capital never deserted London or the rest of the country and investment flows remain strong. Chinese capital in particular has been propping up the UK capital with billion-euro deals and in the same week that Amundi announced it was bypassing the UK, a Hong Kong-based investor bought another trophy asset for €1.1 bn. The fundamentals remain good: office leasing in London is above the 10-year average and Brexit-related job losses have so far been very limited.
Shift to alternatives such as hotels and student accommodation
One investment trend that has become more prominent in the UK in recent years is a shift to alternatives such as hotels and student accommodation. Heavyweight Continental investors like Dutch pension funds APG and PGGM have ploughed into residential and in May this year, Paris-listed Covivio (formerly Foncière des Régions) forked out almost €1 bn for a hotel portfolio from Starwood Capital. Indeed, new capital from all over the world including Japanese investors, South Korean insurers and Canadian and Australian pension funds are targeting the UK market.
Interest rates remain at a low level
The Brits are also putting on a brave face in terms of the inevitable and long-overdue rise in interest rates in the UK. Attendees at Savills’ annual Financing Property summit in early June heard that it is a question of when, not if, interest rates will rise. But even if they rise quickly, they remain at a low level by historical standards.
The UK will always be an island in Europe, but never totally apart.