The right moves: Uncertainty for now but London's reputation as a 'safe haven' will prevail
Published 07/07/2016 | 02:30
London was an interesting place to be last week and there's an atmosphere of shock in the city. To get a feel for any likely effects of Brexit on the property market, and opportunities or fallout for the Irish market, I met some top players in the London investment world.
Irishman Fergus Keane is a Senior Director of London Capital Markets at Cushman & Wakefield and is an established dealmaker in the investment world. Keane is confident that London will remain attractive to international investors.
He believes that with interest rates predicted to fall post-Brexit, prime office yields of 3.5pc in locations such as Mayfair compare strongly with a 10-year UK gilt yield of 0.9pc. That office investment yield is similar to prime yields in competing 'gateway cities' such as Paris and New York.
Keane says: "London has longer leases, tax advantages and more transparency. Few asset classes can offer the return that the safe haven of London does, despite Brexit."
He also predicts "polarisation around risk", supporting prices for prime investments with long leases, but possibly reducing prices for properties with some risk, such as short-term income. Keane "is not convinced" that prices in the prime West End will soften, as supply will stay restricted.
He tells me there was Stg£900m worth of investment property available in the West End 10 days ago, and just five properties made up £500m of that.
However, last Monday, market sources were already indicating two of those buildings were withdrawn by vendors choosing not to sell into an uncertain market.
Keane sees more subdued demand for offices and says that since Brexit, tenants may seek to negotiate better terms to complete deals. Some landlords will do deals, he believes, and focus on driving income.
He also sees a "pause" in large new construction starts. He says Dublin could be a net beneficiary of some occupiers looking to relocate roles that are not essential to perform in London, depending on the outcome of discussions with Europe.
He also sees a weaker pound boosting London tourism and retailing.
"There are low vacancy rates and shop leases in top locations like Bond Street command 'key money' of £5m-£10m. Prime retailing wasn't affected much by the 2008 crash, and it shouldn't be this time either," he says.
Overall, Keane feels that while there is no "distress" in the market, buying and selling decisions will be delayed "until the macro and political picture becomes clearer".
"There may be opportunities for well capitalised Irish investors," he adds.
Just a few steps off Regent Street, Savills has an impressive new global headquarters, with a lobby on the scale of an airport terminal. There I met top investment director Mark Garmon-Jones, who told me that institutional investors had reduced their buying in 2016 as Brexit loomed. However, they had been replaced by an influx of new overseas buyers with an interest in lots of over Stg£5m lot size.
The day of the referendum result was "the most interesting of my career" he told me and "like Lehman Brothers, we have lots of uncertainty".
Garmon-Jones advised me that a proportion of contracts signed this year incorporated a "Brexit clause", allowing purchasers to opt in or out of deals, depending on the referendum result. This will be a nervous week in the UK as those decisions come through. Personally, I suspect a third option will arise - an offer to do the deal, but at a lower price.
Garmon-Jones now fears a period of "stagnation", which is the worst thing for agents, with no sellers and no buyers.
At the airport I met David Ashmore, Managing Director of Sotheby's International Realty. He introduced me to Wendy Purvey, Sotheby's Head of Global Marketing and David Russell, Sotheby's Head of International Marketing, who were in Dublin to support the ramping up of Sotheby's brand here. Underlining the global nature of our markets, Purvey emphasised the strength of Sotheby's international connections in sourcing "top-end" buyers and sellers.
Ashmore told me approximately 70pc of buyers in Ireland for properties priced at over €2m are based overseas.
He also told me Sotheby's handles "exceptional properties, not necessarily exceptionally priced properties".
He sees opportunity for Ireland as currency fluctuations increase overseas buyers' purchasing power. Brexit is likely to cause some stagnation in London. The turmoil in the property funds since last Tuesday is the first real sign of stress in the market. Irish agents will be hoping the contagion is limited while looking to capitalise on opportunities.