SPECIAL REPORT: Stepping into the unknown

When the results of the EU referendum finally came in at around 6am on June 24, one London-based fund manager told PERE he was sure he could hear an ear-splitting, collective expletive echoing around every private real estate firm in the City of London and beyond. The decision by the British people sent shockwaves not just around the British capital but the world. 

Within hours of the result, the pro-Remain British Prime Minister David Cameron emerged ashen-faced from 10 Downing Street and announced his resignation with immediate effect. By the end of the day, stock markets in Europe, America and Asia had slumped, wiping $2 trillion off their total value, the pound had hit a 31-year low and Wall Street suffered its biggest fall in 10 months, as economists predicted the UK would be pushed into recession.

Two months on, with new leadership installed and the first Bank of England interest rate cut in seven years, the end of the world has yet to occur and relative calm has seemingly been restored, albeit under a cloud of uncertainty as the country enters uncharted territory. Since June 24, PERE has been speaking to the market about the impact of Brexit, the health of the private real estate industry and, where possible, the hurdles to be faced in the weeks and months to come as the prospect of triggering Article 50, the formal legal process of leaving the EU, looms on the horizon.

In private real estate, the immediate aftershock of the Brexit vote was seen in the lockdown at some of the UK’s largest open-ended retail property funds. Less than two weeks after the vote, and fearing slumping commercial property values in the wake of the vote, news emerged that jittery investors had begun a rush of redemptions in the funds. 

The first firm to react was Standard Life Investments, the asset management arm of the insurance giant, which immediately shut the gate on its £2.9 billion ($3.8 billion; €3.4 billion) Standard Life Investments UK Real Estate vehicle. Speaking a fortnight on from the freeze, Standard Life chief executive officer Luke Savage said the move was about “dampening market volatility.”

“If 10 percent of your customers come back and demand their money back, you can’t sell 10 percent of the commercial real estate portfolio in an instant,” he said. “The suspension was a dampening mechanism that stops too much volatility within a fund and enables us to protect all investors.” 

The move triggered a domino effect of sorts as Aviva Investors followed suit hours later, with M&G Investments doing the same the following day. Fear began to set in and four more firms, Henderson Global, Columbia Threadneedle, Canada Life and Aberdeen Asset Management also suspended their funds, as the likelihood of having to sell assets to fend off the ensuing liquidity crisis became a reality. 

At this point, in total, more than £18 billion, or 70 percent, of the UK’s £25 billion property sector connected to these types of funds was under lock and key. 

Aberdeen took a slightly different approach to its peers in order to stem the tide of redemptions. After halting trading for five days, the firm forced investors to accept a 17 percent price reduction for any capital withdrawn from the fund. The suspension was continued for a further two days but, according to the firm’s chief executive Martin Gilbert, the strategy worked because the majority of investors had withdrawn their redemption requests as a result.

In mid-August, Aviva became the first of the affected funds to announce a long-term gating measure on its open-ended fund, telling investors they would not be able to redeem their cash until at least the first quarter in 2017.

Panic window

Despite taking extra steps to solve its liquidity issues, Aberdeen was still forced to sell two of its assets. Norges Bank Investment Management, the investment manager of the Norwegian sovereign wealth fund The Government Pension Fund Global, bought a prime retail and office building in London’s Oxford Street, the 59,000 square foot Sedley Place, for £124 million, a 17 percent knock down on the asset’s reported pre-Brexit sale price of £150 million.

But it was the sale of west London-located 10 Hammersmith Grove by Aberdeen that set pulses racing. It was reportedly on the market for £105 million, pre-Brexit, but was sold in a lightning-fast deal in about three days, to London-based investment manager Brockton Capital, for a figure understood to be in the region of £85 million, a staggering discount of 19.5 percent. Industry insiders began referring to this period as a “kind of panic window.” 

10 Hammersmith Grove was one of the first big post-Brexit transactions. The deal took 65 hours from receipt of papers to completion, according to David Marks, Brockton’s founder. 

“An opportunistic fund like us can only ever aspire to buying a ‘ready made’ core asset by being faster than Usain Bolt in due diligence,” he said. “The institutions and high net worth investors who also looked at the asset were organizing their approval processes to bid, whereas we were already touring the asset with our deal team and our lawyers in tow.”

Marks added: “Generally speaking, we have to buy slightly flawed assets and turn them into core assets through hard work, but the opportunity was there to buy a 10 year WAULT, core asset from day one, due to a temporary liquidity crisis post-Brexit in one pocket of the market.” 

Matt Oakley, head of research at UK property agent Savills, said his firm’s valuers were taking the view that 15 percent of the 19.5 percent discount in the Hammersmith Grove deal came down to how quickly the buyer was able to act. 

“Similarly with the Sedley Place, there were bidders offering at above the asking price that Norges paid,” he said. “But they couldn’t move as quickly.”

A source familiar with Aberdeen believed the firm acted “too hastily,” and said the view was shared in the wider market. He added that the firm may have taken more of a “haircut” on the sales than it needed to, particularly on the Hammersmith Grove disposal. 

Post-Brexit deals

Industry experts believe it is hard to gauge what impact the fallout has had on real estate. Some have told PERE that while currency depreciation has stimulated foreign investment, deal flow has slowed as a ‘wait and see’ attitude has cloaked the industry.   

Oakley said: “Our read of the situation is that more deals have gone ahead than haven’t. Approximately 60 percent of deals were unaffected, while around a third have renegotiated on price.” 

He added: “Undeniably investment volumes are down. The first half of this year was about 34 percent down on last year, but that’s not a million miles away than we expected, and it was most likely down to deals being put on hold until after Brexit.”

He also believes some sectors and regions in the UK have been affected more than others. “Larger lot sizes such as offices, particularly in the City of London, and shopping centers are down but regional office markets such as Bristol, Birmingham and Manchester are up year-on-year. The least affected are high street shops and regional offices as well as more defensive assets such as logistics, he added.

This view is shared by property services firm CBRE, whose monthly index for July reported that office transaction volumes in the City of London were down 6.1 percent compared to June. New York-based research firm MSCI went a step further in mid-August by declaring that the UK commercial property market was “in recession” following two consecutive months of falls in value. Its UK Monthly Property Index cited a 0.3 percent reduction in June followed by a 3.1 percent reduction in July.   

According to Oakley, despite the market uncertainty, a number of major deals do seem to be going through or have gone through in London at pre-Brexit prices, such as Goldman Sachs’ £1 billion sale of hotel chain Travelodge to an as yet unnamed buyer and UK REIT British Land’s £400 million sale of Debenham’s on Oxford Street to retail giant H&M’s boss Stefan Persson.

Lease transactions involving financial services companies also have been noteworthy, including US bank Wells Fargo’s commitment to a new headquarters in the Square Mile (the colloquial name for the City of London), the first major deal after the referendum and one that many believed fed confidence back into the market.

One notable lease deal that fell by the wayside, however, was Swiss asset management firm GAM Holdings, which pulled out of a deal to lease offices near Buckingham Palace. The Zurich-based firm had been seeking to rent a 50,000 square foot space in London. 

Impact on values and rates

To date, the Brexit decision has affected both property valuations and interest rates in the UK. Certain UK property investors have expected discounts on acquisitions, which in turn have been a drag on real estate values. “The story so far depends on the buyer,” said Oakley. “If the buyer is non-domestic and has taken advantage of the currency movements, then they are probably not bothered by asking price. If they are domestic, they want a chip. The average so far has been about 2 percent to 3 percent, but the range is about 0 percent to 7 percent.”

Manish Chande, partner of UK-based fund manager Clearbell Capital, believes a revaluation of approximately 5 percent to 10 percent has become apparent after those initial few weeks post-Brexit, although there have not been many significant transactions since the referendum that necessarily corroborate this.

“In terms of our fund, this sentiment change on the face of it could lead to opportunities for acquisition but we have not seen this to a significant extent at this stage, probably partly because of the summer holiday period. It will be interesting to see what happens over the next couple of months commencing in September,” he said.

“However, one effect in terms of existing investments is that the fall in the pound has certainly brought more interest from overseas investors, particularly those that are dollar-based,” he added.

The Brexit vote also is said to have contributed to the Bank of England cutting interest rates last month from 0.50 percent to 0.25 percent, the first cut since 2009. The move was regarded to have both positive and negative effects for real estate.

“In terms of the reduction in interest rates, we have seen some benefit in terms of debt but this has been offset by the slight increase in margins from the banks,” said Chande. “In addition, although probably a little too early to say, one would expect property to be a more attractive investment given the low returns in cash or near liquid assets.”

Sorting out passporting

Then there are the legal issues involved with real estate fundraising post-Brexit. Getting the ‘passporting’ situation sorted out before the UK’s actual departure from the EU is crucial to avoid a period when UK managers would be unable to access EU investors.

The UK’s exit from the EU would mean UK fund managers would no longer have automatic access to a pan-European marketing passport under the Alternative Investment Fund Managers Directive (AIFMD), making marketing funds to European investors much more complicated than it is today.

Currently, fund managers domiciled outside the EU must apply to each EU country in which they wish to market their funds for approval under its national private placement regime (NPPR).

Those outside the EU can apply for a passport, and as the UK already has an AIFMD-compliant regime in place it would be “technically straightforward” to extend the passport to the UK, said Simon Currie, partner at global law firm Morgan Lewis.

“Obviously there may be a political dimension which comes into play about whether the Commission would be prepared to extend the directive to the UK,” he added.

The EU’s financial regulator, the European Securities and Markets Authority (ESMA), has only recommended three non-EU countries: Guernsey, Jersey and Switzerland, for the passport. None have actually been granted.

There is also a chance ESMA will not make this recommendation for the UK before it exits the EU, which would leave a period when UK managers do not have European marketing rights and would have to apply for NPPR approval in each country.

Following a Brexit, overseas fund managers looking to market their funds to UK investors would be subject to the UK’s pre-AIFMD private placement regime or any new regulations the UK government chooses to implement.  

What’s next on the horizon?

With UK Prime Minister Theresa May stating that the triggering of Article 50 will happen in 2017 at the earliest, the next major event which will have an impact on the UK economy, and subsequently the real estate market, will be new Chancellor of the Exchequer Phillip Hammond’s debut Autumn Statement in November.   

Khalaf said: “If we are looking ahead from the UK’s point of view, the next really important event is probably the Autumn Statement and that will be the point where we find out whether fiscal policy is going to adapt to what is perceived as changing conditions.”

Another key factor, according to the market experts, will be the data on UK retail sales from the third quarter, most likely to be released at the beginning of October, as retail sales are a major indicator of consumer confidence. Retail figures released in mid-August showed sales smashed forecasts, jumping 1.4 percent in July, according to the UK’s Office of National Statistics. 

The common consensus of the road ahead is uncertainty, unprecedented times and a step into the unknown. As the political and financial worlds become increasingly interwoven over the coming months and years, the summer of 2016 will not be soon forgotten.


24 June
The Leave vote wins by 52 percent to 48 percent to leave the EU. Voter turnout is 72 percent.
David Cameron resigns as Prime Minister. Sterling plunges to $1.3228, its weakest level since 1985.

4 July
UK insurers Standard Life, Aviva and M&G suspend trading on their commercial retail RE funds.

5 July
Henderson Global becomes fourth firm to suspend trading. €13bn of UK property is now gated.

6 July
Henderson Global becomes fourth firm to suspend trading. €13bn of UK
property is now gated.

7 July
Canada Life and Columbia Threadneedle become fifth and sixth firm to suspend trading on
their funds.

11 July
FTSE 100 hits 11-month high, closing 1.4 percent or 92.2 points higher at 6,682.8.

12 July
May is announced as Prime Minister-in-waiting as Cameron fulfills duties on last day in office.

3 August
Bank of England chairman Mark Carney cuts interest rates to 0.25 percent, the first cut since 2009.

11 August
Aviva Investors announces that its fund suspension will last until 2017 at the earliest.