Brexit uncertainty key theme at MIPIM, signs of German nerves
The issue of Brexit inevitably came up in all serious discussions about commercial real estate at the recent MIPIM in Cannes. The British referendum on June 23rd on whether to remain in or leave the EU was clearly a key theme occuping minds, and added to the undercurrents of uncertainty that rippled through the annual event like the cold wind – and the rain – that characterised this year's gathering.
While investors are increasingly being driven to assume ever-higher risk in a search for adequate returns, the Brexit question adds another layer of risk to investor strategies. This is having noticeable effects on investment levels in the UK, where data from February and March confirm a slowdown, in favour of increased volumes in continental European countries.
Richard Divall, head of cross-border capital markets EMEA at Colliers International, said at the MIPIM that "increasing number of UK institutions are now sitting back and watching, and that of course affects what the internationals do." He added that many investors who are plowing ahead with UK transactions are looking to insert opt-out clauses in their contracts as a protection against a UK public vote to leave the EU.
There is some evidence that European markets (bar the UK) are reaping benefits of this "Brexit pause". Germany saw €2.3bn of large deals (of over €20m) in February, with France and Britain coming next at €2.2bn, Sweden at €1bn, Spain at €900m and even Portugal at an unseasonally high €480m. JLL Germany's CEO Frank Pörschke said at the MIPIM that, despite uncertainties other than just Brexit, his group expects investment volume this year to remain stable at or about last year's level of €55bn.
There are concrete examples of the effect Brexit is having on German investment behaviour. Germany's largest real estate fund manager Union Investment has delayed the purchase of at least one London property in the financial district until the outcome of the vote. According to Dr. Frank Billand, chief investment officer of Union Investment's real estate unit, "Until a decision has been made we are being cautious with speculative investments in London, which have leasing risk. We’re a bit apprehensive because we don’t know how things will turn out."
Union Investment manages €252bn of assets, including €30bn of commercial property, and its decisions are widely tracked by the market. It had earlier secured exclusivity to buy 51 Eastcheap in the City for Stg£50m, and planned to refurbish the property with City Office Real Estate LLP, before it suspended talks at the end of February. According to Billand, "For us, it was significant when Boris Johnson came out in favor of an exit because he’s an important opinion maker."
A new study by CBRE showed that 73% of 200 investors surveyed said their interest in investing in the UK would decreast, should voters opt to leave the EU. According to Neil Blake, CBRE's head of research for the EMEA area, "The upcoming Brexit referendum is already causing uncertainty for investors, users, developers and other UK real estate market participants. It's hard to give a definite prognosis on the concrete outcomes of a possible Leave vote. All of this is leading some investors to take a wait-and-see approach, while others view it as an opportunity."
"Whatever the result of the referendum, the economic strength of the UK means the referendum is just one factor among many affecting their decisions. For the rest of Europe, the outcome of the referendum is unlikely to have major effects either for investors or for users. Given the low returns on bonds and the volatility on the stock markets, strong domestic and international capital flows are going into continental European real estate markets, and we don't see the referendum as likely to reverse these in any way."
A UK vote to leave the EU might motivate non-European companies to switch from, or open additional offices to, the UK to ensure they have unfettered access to the EU internal market. Jan Linsin, head of research at CBRE in Germany, says, "This could lead to heightened demand for property in continental Europe, particularly in Paris and Frankfurt, which would be natural alternatives."
A recent report from Frankfurt-based bank Helaba also weights up the repercussions for European property should the UK voters decide in June to back out of the EU. London would be affected by numerous relocations to the continent's banking centres by many non-European companies, along with a significant part of financial business. "We put the likelihood of a Brexit at 40%...with the expected downturn in the real estate investment market likely to be stronger than without a Brexit…with London retaining its leading role as a financial centre."
The London market has already been showing evidence of a weakening in the development of commercial properties, says Helaba, and the British real estate market is comparatively far ahead in the cycle. "Anyone who has recorded appreciations of 20% and more in this market in recent years could now try to take profits. If there is no Brexit – and the betting odds of British bookmakers currently indicate this scenario – little should change for the real estate market", say the researchers.