Britain needs its (office) space
Author
Alex Thompson
Analyst II
Commercial Real Estate in the Post-Brexit Environment
The effects of the EU referendum’s unexpected result for the UK vote to leave was felt immediately in the financial markets and is set to result in significant changes in both our political and economic landscape.
Commercial real estate was one of the sectors instantly affected by the Brexit vote as property funds holding more than £15 billion worth of assets were forced to suspend all trading over fears that commercial property prices could crash amidst a surge in sales.
It is widely accepted amongst economists and policy makers that the referendum result will have a negative effect on the UK economy in the short term. Impacts on the value of Sterling have put pressure on inflation and therefore on the cost of borrowing, driving down the demand for loans. Political unpredictability directly affects business certainty and decision-making in all financial instruments, including investing in commercial real estate.
2017
Brexit
England’s critical juncture in Economic Growth
The historically lucrative attraction of London and the UK as a stable political and economic centre is now at stake. Many firms are unlikely to employ more labour in London whilst the UK’s future relationship with the European Union remains unclear. Furthermore, if the UK fails to negotiate passporting rights, allowing financial companies to operate across Europe from a base in the UK, then a vast amount of London's office space could soon fall empty as these firms relocate their staff. Although London is more exposed in the short term it is critical to remember that it is a global and not just a European financial centre, and its vast assets should counteract some of the potential negative impacts of Brexit.
There is, however an argument that many of the outcomes of the EU referendum will be short-lived, with industry experts claiming that the commercial real estate market is already showing signs of recovery pertaining to an underlying strength in the market. The global demand for investment has not declined as a result of the 'Leave' vote and buyers looking for somewhere to invest will still consider the fundamental benefits of investing in UK commercial property. Commercial property funds could actually profit from Britain's exit from the European Union, as foreign buyers take advantage of the weak Sterling and cheaper British exports to purchase British property assets at a relatively lower price.
Until recently, commercial real estate firms had been in a strong position due partly to a steady increase in property sales. In spite of the 'real estate rally' earlier this year, share prices began to drop in the run up to the vote as concerns grew about the strength of the main players in the world economy, including the UK. It could be said that the surprise outcome of the EU referendum is in fact only accelerating the decline in a market that always had the potential for losses.
One of the most important factors in this recent uncertainty is the uniqueness of the UK’s current situation as such a substantial economy has never left an economic trading bloc the scale of the EU before. Analysing historical data is a key fundamental in predicting future possibilities, especially in the financial markets, so the scarcity of historic evidence to draw upon only confounds the uncertainty regarding the future of the UK commercial real estate market.
Despite some opportunistic investors trying to benefit from speculative investments in the short term it has been shown that it is the longer term investors, typically institutional and those dealing in large transactions, that have not reacted to the current hysteria in the commercial real estate market and instead have taken into consideration the inherent strength of the UK economy, with a view to making a bigger, less risky return in the long term.
Alex Thompson
Alexandra joined FinTrU in 2015. She was previously a member of the FinTrU Commercial Real Estate Loan Portfolio Servicing Team, where her key focus was in the area of Commercial Real Estate Loan Administration and Investor Reporting.
Alexandra is a BSc Hons Geography graduate from Queen’s University Belfast. Keen to develop a career in financial services, Alexandra subsequently came on board with FinTrU during our first year.
Alexandra’s current role is part of the Non Market Risk Team within the Fixed Income Division of a Tier-1 Investment Bank. More specifically, she operates as part of the North America Fixed Income and Commodities Operational Risk Department.
Alexandra is responsible for the creation of Operational Risk Current Issues Meeting Packs for the regions of EMEA, Japan, APAC and Americas. Alongside this, she is also tasked with ensuring Issues and Action Plans impacting Fixed Income, Commodities and Bank Resource Management are documented and remediated globally.