Monday 20 January 2020

The right moves: A 'Crème Brûlée' Brexit could suit Irish appetite for UK property market

Paul McNeive
Paul McNeive

Paul McNeive

London was an interesting place to be over the last week. US president Donald Trump was in town, spreading chaos, and the UK government was lurching from one Brexit crisis to another. Theresa May's White Paper is being described here as a "crème brûlée Brexit" (hard on top, soft underneath) and is regarded as pro-business, but each day seems to bring fresh uncertainty. In an effort to make sense of the effects on the UK markets, and identify any potential opportunities, I met Mat Oakley, Head of Savills UK and European commercial property research team.

London office investment sales will be down 15pc, year-on-year, although Oakley puts this down to a lack of big lots, rather than a shortage of stock. The second quarter was more active and deals such as Goldman Sachs' new headquarters, the new UBS building and the Royal Mint Court sale, saw over Stg£3bn of deals done in one month.

The main buyers include those from China, Hong Kong, Korea, Singapore and Malaysian funds, seeking trophy lots. A big surprise is that the euro-denominated funds haven't been more active this year. Prime city office yields are between 4pc and 4.25 pc, but with prime yields in Paris and Berlin "in the 3's," and Dublin heading that way, it's clear that European funds are being put off by Brexit and the cost of currency hedging.

Oakley points out that: "European investors are more concerned about Brexit than other geographies.

"Many overseas investors are often investing against a background of greater instability in their own countries e.g. Israel and Korea."

Prime retail yields have moved out by half a percent over the last 12 to 18 months and Oakley says that is due to structural changes caused by internet shopping, the softening of the pound, and higher costs for staff, imports and rates. These combined to "create the perfect storm - and produced the worst year in retail for 20 years."

The big change in the occupier market over the last six months has been a rapid swing away from concerns that "Brexit spells the death of the financial services business."

The consensus now is that between 7,000 and 8,000 jobs may re-locate and developers are now reassessing development opportunities. The office market has very few voids and leasing activity in the first half of the year is up 10pc year-on-year. Between 30pc and 40 pc of the supply pipeline is pre-let. Prime office rents are approximately Stg£70 per sq ft, towers in the city are in the Stg£80's, while the Mayfair/St James areas are firmly over Stg£100 per sq ft.

The only skyscraper being built in the City of London is 22 Bishopsgate, comprising 1.3m sq ft. The decision by Axa to recommence its development looks like paying off, as the tower is 60pc pre-let.

Oakley advises that the retail sector is an interesting opportunity. "Retail is re-pricing, from tertiary to prime and there will be increasingly-good value for retail investors as the year goes on," he says.

Mat Oakley told me that the logistics sector is "incredibly hot due to internet shopping." The first half of the year saw a record level of take-up by occupiers. Industrial investment turnover is normally between Stg£3bn and £5bn per annum, but last year there was over Stg£12bn of sales. Yields have hardened to a range between 4.75pc and 5pc and some logistics deals have been done inside London "at yields in the threes, where there may be a hope of achieving a residential planning permission."

He advises Irish owners of industrial/logistics investments that there has never been a better time to sell, but those looking to buy logistics, should do so on mainland Europe.

"Yields are going to keep hardening in Europe and the yields are 3pc higher than prime offices, in western Europe."

A tip from Oakley for risk-averse Irish investors is to look at the UK regional office market-for three reasons. "The regions are one to two years behind in the cycle, the development pipeline is even more constrained and 55pc of the supply pipeline in the top nine regional cities is already pre-let.

"There's two to three years of good rental growth coming through," he says. The 'hottest' cities are Bristol and Cambridge.

Oakley says that Glasgow and Edinburgh are opportunities, as they missed out on some of the UK recovery, as investors were concerned about the independence referendum. "Yields are 25 basis points higher than Manchester, but they are big cities, with the same undersupply."

Investors will find opportunities in Brexit and political uncertainty, although as Mat Oakley concludes: "Politics has remarkably little effect on property markets - there is no correlation in the UK between values and certainty."

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