The UK dual headwinds split investor opinion

Alex Price, CEO UK, recently spoke with Evelyn Lee of PERE to discuss the effects that COVID-19 and Brexit will have on investing in the UK real estate market. Originally published by PERE in January 2021.

The newly signed Brexit deal with the EU and the surge of a highly contagious coronavirus variant have kept the UK in global headlines in recent months.
The impact has been felt on the country’s property markets, writes Evelyn Lee.

“The two things that everybody is going to remember about 2020 are covid and Brexit,” says Alex Price, chief executive of the UK business of Canadian manager Fiera Real Estate. “Those are the two major, immediate things that affected the UK market in the last year.” The new virus strain has been blamed for a spike in new covid-19 infections, which topped 60,000 a day by early January, prompting the UK government to enforce a third national lockdown. The shutdown was understood to be a major factor in Dallas-based manager Lone Star Funds pulling the £3 billion ($4.1 billion; €3.1 billion) sale of UK residential property company
Quintain after it was due to receive formal bids last month.

“The third lockdown will affect sentiment in the UK market; the fact that Lone Star pulled the Quintain sale reflects this,” Price says. “We can see why Quintain may have struggled to attract a premium bid, given the physical constraints from a lockdown and its very focused London portfolio.”

Other sellers also halted sales, particularly in central London, where the market is more reliant on overseas buyers, observes Chris Brett, head of EMEA capital markets at brokerage CBRE. “They want to wait to see that the travel restrictions are eased,” he explains. “To ensure success for a sales process targeted at global capital, open borders will add confidence to a marketing campaign.”

Some investors, however, are unfazed by the latest lockdown. Peter Ballon, global head of real estate at Canada Pension Plan Investment Board, saw UK deals stall
in the early days of the pandemic, including the sale of the pension plan’s 50 percent ownership interest in the first phase of Nova Victoria, a mixed-use development in London.

The deal, which was under contract pre-covid, subsequently collapsed, although the interest was later sold to Singapore’s Suntec Real Estate Investment Trust at pricing similar to pre-covid levels, Ballon notes. “We had a two- or three-month pause in new investments,” he says of the early pandemic days. “After that, we have continued as business as usual and so have our partners.”

Indeed, Ballon remarks that the pension plan’s current quarterly real estate investment activity in the UK – which is the fifth largest market in CPPIB’s property portfolio, accounting for more than 10 percent of its real estate holdings – has returned to its pre-covid pace. 

Meanwhile, Brexit remains a cause for concern in that the EU has yet to decide whether UK financial services firms will be granted ‘equivalence’ over the medium term and therefore the ability to continue to operate in Europe.

If UK firms are not granted equivalence, Price would be concerned about how the London financial services sector, and consequently the London City office market, would perform. “But I think it would be wrong to write off the UK office market,” he says. “Although at the moment, because we’re not sure about financial services, if we are looking at offices, we’re more regionally focused.”

Brett asserts that investor demand for UK real estate has risen rather than fallen in 2021 post-Brexit: “If you’re looking at core and durable income streams in office, logistics, multifamily and probably central London retail, the bidder pool is deeper today than it was in October, November. The bidder pool is more diverse in its geographical origin. It is more comfortable to transact in the post-Brexit world than it was pre-Brexit.”

Total investment in UK real estate across property sectors had plummeted from £14 billion in Q1 2020 to £4.4 billion in Q2 – the first full quarter to be impacted by covid lockdowns – but had rebounded to £16 billion by Q4, according to CBRE data. Brett expects investment from both domestic and overseas groups to continue to increase in 2021, given the greater clarity around Brexit.

“For durable income streams with strong covenants in the most desirable sectors, pricing has been less affected due to Brexit or covid,” he says. “If anything, pricing for real estate with these qualities is becoming stronger due to global investor demand.”

From Ballon’s perspective, “Brexit has a potentially longer-term impact on real estate and that has yet to play out.” Although Brexit has created greater uncertainty in
the UK office sector, that would not preclude the pension plan from investing in the property type. “For us, it’s all about being paid appropriate risk-adjusted returns,” he says. “So, if the uncertainty caused by Brexit is reflected in the returns, then we would continue to be an investor.”

Isabelle Scemama, global head of AXA IM Alts, says the French insurer has been historically under allocated to UK real estate, which she attributes in part to “a degree of cautiousness related to the Brexit backdrop.” Nevertheless, AXA IM – which manages €5.3 billion in real estate equity in the UK – has continued to execute transactions in the country, including last year’s acquisition of London’s Dolphin Square, the single-largest private residential complex in the UK. “We remain open and the UK continues to be a key territory for us,” she says. Turning away from the UK The challenges with Brexit and covid have led some institutions to turn away from the UK, however. Alberto Agazzi, chief executive officer and general manager for Generali Real Estate, remarked at an INREV event last month: “It has now become difficult to invest in the UK given Brexit and covid. But on the other hand, European markets in a shift to core have become safer.”

Others, however, are looking past covid and Brexit. “In the long run, we continue to believe in London,” says Scemama. “We are now in a situation of being under-allocated and have the capability to seize on opportunities, rather than be in the situation where we have to manage challenging situations.” Such was the case with the Dolphin Square deal, which was signed during the first UK lockdown, when few other assets were trading.

 “In some situations, the best investment opportunities happen when there is uncertainty in the market,” Ballon agrees. “The UK is a very popular market to invest in, so when there’s less capital pursuing those markets, that sometimes creates the best buying opportunities for us.