UK election: the ‘result the markets feared’

Britain’s private real estate sector is ‘less attractive’ and could be in line for a ‘correction’ as a result of the country’s second surprise vote in 12 months, fear senior executives. 

The Conservative government’s failure to secure an outright victory in Thursday’s general election will add to a climate of uncertainty surrounding the UK’s property market, warned senior executives in the sector.

At the time of publication, Prime Minister Theresa May had formed a minority government following a deal to ensure the support of Northern Ireland’s Democratic Unionist Party, essentially cementing what will be a weaker position for the Conservatives than was imagined when she called a snap election seven weeks ago.

The outcome has led private real estate investment managers to repeat the warnings that followed last year’s referendum vote by the UK on its membership in European Union. However, some predict this latest political event will prompt opportunistic buying by those more comfortable with higher risk.

Jos Short, founder of London-based private real estate fund management firm Internos, said US investors had already labeled the UK a less appealing property marketplace. “I get the feeling that the US players, even though they can be pretty gung-ho and tend to dominate the opportunistic world, in times of uncertainty they are actually very thoughtful and quite cautious,” he said.

“We met with a US investor this morning and they said it made the UK look less attractive, but was good for continental Europe. It is also likely to mean a softer Brexit. The key indices to watch are leasing momentum and deals getting done and at what level.”

Short pointed to the stock market for signs of the first tangible impacts of the election result, specifically the UK’s housebuilders suffering share price losses. By 1pm, Barratt Development shares were down 2.6 percent, Taylor Wimpey down 2.23 percent and Persimmon Homes down 2.1 percent. The country’s commercial property REITs also saw value wiped from their market capitalizations. Notable fallers were Land Securities, down 1.7 percent, and British Land, down 1.5 percent.

“There is a question mark whether UK asset values are going to fall because of [the pound] weakening,” Short added. “If you buy the currency argument as a reason for buying real estate because it looks cheap, if you are dollar denominated then the capital side of the equation may hold up.”

Carol Hopper, real estate partner at City of London law firm Ropes & Gray, said the result could lead to opportunity for higher-risk players, as well as a property value adjustment. “This result may well lead to a market correction, which could increase deal activity as investors look to sell positions and opportunistic buyers selectively look to take advantage of that,” she said.

But an opportunistic market was precisely the outcome that UK-focused property fund managers did not want. Dominic Rossi, global chief investment officer at the real estate platform of asset manager Fidelity International, said the election provided “the result markets feared.”

“Markets were wrongly positioned, and international confidence in the UK will suffer. Sterling is the first casualty. The uncertainty will put a lid on the UK equity market,” Rossi said. “The prospect of another election within next few months, coupled with the Brexit negotiations which are more unpredictable than before, raises the risks for all investors in UK equities.”

However, Zachary Gauge at UBS Asset Management, Real Estate and Private Markets, urged executives in the sector to suspend judgments until the dust settles on the result. “I think we’ve learnt from other recent surprise results that the short-term impact of political events on the real estate markets can be heavily overstated. Liquid financial markets react very quickly to news, but real estate tends to be much more stable and will continue to be driven by the underlying fundamentals,” said Gauge.

“But, in terms of longer-term impacts, the Brexit negotiations clearly have the potential to impact the underlying fundamentals of the UK real estate market. And whatever the outcome of internal negotiations and potentially another general election late in the summer, the strength of the negotiating position of the next UK government has clearly taken a set-back by this result.”

From a lender’s perspective, Hayley Scott of Investec Structured Property Finance said the impact on sterling and inflation was of greatest concern.

“Today’s election result will have a major impact on the real estate market as well as the wider economic landscape,” she said. “Volatility and uncertainty may return to the sector. We expect sterling to initially fall sharply on the prospect of Brexit talks falling into turmoil, putting further pressure on currency-linked inflation as import prices continue to rise.”

Scott added that a number of proposed new construction projects could be put on hold as the property sector takes stock of the result.

As a consequence, the banks would be cautious about financing new developments and real estate, as an asset class, could subsequently lose favor with institutional and overseas investors, she said.

Melanie Leech, chief executive of the British Property Federation, said the business community would react adversely to increased levels of uncertainty.

“This is not the outcome the country needed going in to the Brexit negotiations or in terms of setting a clear direction for the UK’s future,” she said. “Businesses don’t like uncertainty and there will clearly now be a further period of uncertainty, which will be unhelpful.”