Time to dust down the falling knife analogy when discussing the UK

To rapturous applause from her Conservative party peers, Liz Truss stated she would “deliver, deliver, deliver” after being announced as the UK’s new prime minister on Monday.

Within days she launched her first broadside combatting energy costs for households and businesses by declaring monetary stimulus which could add more than $100 billion to the county’s debt, according to various estimates.

Individuals might breathe a sigh of relief at seeing their energy bills capped at £2,500 ($2,870; €2,885). Institutional real estate investment managers, on the other hand, are cementing already cautious positions on the UK while they assess the impact of this “curve ball” measure, as one manager put it to PERE this week. Eyeing the immediate hit on the British pound, he said that might take 12 months or more to do.

He was among those who felt better risk-adjusted outcomes would be available in his firm’s other core European markets of Germany, France and the Nordics. That is quite the inditement of the UK when you consider Germany, for instance, has seen investment volumes fall away by 56 percent in the last quarter, per MSCI Real Assets data, as the energy crisis has enveloped the country.

High risk and return managers should theoretically be on the lookout for bargains in a country where many financial structures, including property ownerships are being severely stressed by current conditions. There are indicators demonstrating stress is close. For instance, according to affiliate title Real Estate Capital Europe, lenders are increasingly anxious to understand the affordability statuses of their borrowers’ tenant bases and they have stepped up their communications with their servicers to learn more.

But here is where managers are dusting down the old analogy of falling knives. They are, predictably, keen not to catch any. One manager told us the impact of this week’s developments on the currency markets alone – where talk of pound-dollar parity has now surfaced – has meant placing new bets in the UK needs razor sharp precision. Only areas of resilient structural change make sense for him and that means the living sectors of private rented, student and senior residential. He indicated a preference to aim his firm’s European arsenal at the continent instead for other sectors.

Such an aversion is supported by PERE fundraising numbers: fundraising for value-add and opportunistic remits with either a sole UK focus, or that have expressly included the UK as an investment target country, have declined year-on-year for the past three years. The $1.59 billion tracked so far this year for this profile is some 63 percent down on the $4.34 billion raised as recently as 2020.

Valuations in the country are not in freefall, but they have reversed and there is negative momentum. According to brokerage giant CBRE, capital values in the UK fell 1.6 percent in August after reducing 0.5 percent in July –  the first decline after 16 consecutive months of growth. Future sentiment is not looking rosier either: the FTSE EPRA NAREIT index of UK-listed property companies is demonstrating -15.38 percent over the last three months; 24.71 percent over six.

Truss’s victory as the UK’s next prime minister has split opinion, not just between Conservative and Labour supporters, but within the Tory party, with former Chancellor, Rishi Sunak, winning about 45 percent of the vote. His policies were broadly considered a longer game, something that sits more comfortably with institutional capital.

Truss is expected to attempt to disentangle certain Europe-inspired regulation, such as the Solvency II capital requirements for insurers. That might be a net positive for private real estate depending on how insurers reinterpret their property exposure plans in response. But her initial energy relief plan has not demonstrated much in the way of ‘delivering’ for private real estate generally in the near term if immediate currency and stock market reaction is anything to go by. For now, private real estate executives are indicating they will spend more time and money elsewhere.