European real estate transaction data for 2016 has made bleak reading for many, and the UK – the region's largest marketplace – is perhaps the most depressing reading of all.
Weaker market sentiment and risk-averse buyers were responsible for pan-European transaction volumes falling 20 percent year-over-year during the first quarter, according to property services firm JLL. The UK suffered the heaviest loss, with a 37 percent decline in property deals.
Much of the consternation surrounding the UK's real estate market has come down to the impending ‘Brexit’ vote.
Property professionals speaking to PERE said that the upcoming referendum on whether the UK should remain in the EU has prevented would-be buyers from pulling the trigger on UK property deals. Even buyers who are further into a process are increasingly looking to negotiate clauses that would allow them to back away from a deal in the event that the vote is for Brexit.
And, this is occurring across the risk spectrum, with some sovereign wealth funds having put a moratorium on all London investments until after the referendum. One corporate lawyer said that he could name at least five fairly large UK deals that have just been put on ice. When he was asked why, the answer was always the same: Brexit.
The fear is that if the UK were to vote to leave the EU, it would take time until one understands what kind of trading and institutional relationship the UK would develop with the EU. The nature of that relationship will determine the long term effects of Brexit on London. Everyone is currently unsure of the amount of businesses that would consider moving some of their operations to Ireland or Brussels in order to continue in an uninterrupted fashion.
But, numerous real estate executives told PERE that over the long term, they expect that the UK will continue to represent one of the major global economies and London is likely to remain a significant global financial center.
Given London's global importance, PERE asked: why would through-cycle property owners balk at London now?
The answer is multi-faceted and starts with reluctant sellers. A chicken-and-egg situation has occurred with hesitant sellers not wanting to invite offers which would be below expectations and trigger some sort of asset revaluation.
For the institutions writing the biggest checks, playing the waiting game may also yield significant currency gains. In the event a Brexit does actually happen, there is a realistic prospect that the UK’s currency will come under pressure. It makes no sense to invest at the sterling rate now when it might go down.
In a similar vein, if a Brexit does come, there will be a couple of years of trade negotiation between the UK and EU, creating uncertainty in the marketplace. Overseas investors may think that such a period will be a more opportune moment to find some value than there is today.
On the flipside, if one were to assume – as many in the industry do – that a Brexit does not happen, and sterling strengthens and prices edge higher, it is still not too burdensome to wait. Investors have told PERE they can explain to their boards that they were waiting to invest in a time of more certainty.
One investment manager added that an investment professional at one of these institutions would be very brave to put a reputation on the line by definitively calling the outcome of the vote before the fact. It would have the potential to be a career killer.
So, while many are holding fire on investing in the UK because of misgivings about the country’s future, others are betting that they could gain by waiting.