The U.K. government’s failure to quickly negotiate a deal with the European Union over Britain’s departure from the trading bloc has turned fund managers cold on investing in London commercial property.
Asset managers say they are concerned that job losses and lower rents are now inevitable because the U.K. government has taken too long to secure a deal that gives banks and financial services companies clarity over where they should deploy staff. The result, they say, is that financial firms are already triggering contingency plans and moving staff ahead of any formal agreement on terms of Britain’s divorce from the E.U.
“We are going to get a decision around Brexit that is going to be too late for many of the investment banks and the financial institutions,” Charlie Walker, a director at Legal & General Property Investment Management, said in a phone interview.
Britain voted in July 2016 to exit the E.U. and will officially divorce the trading bloc in March 2019. The lack of clarity surrounding its exit is a blow to London, which has seen exceptionally strong investor interest in its commercial real estate market this year.
In a recent report, real estate firm Savills said the £2.35 billion (about $3 billion) of investor capital flowing into the market in July surpassed a decade-long high of £2.1 billion in March 2007. The Financial Times reported last month that Chinese and Hong Kong investors sank an unprecedented £4 billion into London commercial real estate during the first half of 2017, pushing the six-month total to £12 billion.
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“We have reduced our office exposure to zero. After the Brexit, we didn’t see value in the offices,” Rogier Quirijns, senior vice president and portfolio manager at Cohen & Steers, said in a phone interview. “The big picture since the Brexit is we have also further reduced our exposure to U.K. retail in favor of exposure to logistics and alternative asset classes in the U.K.”
Quirijns’ approach is similar to Legal & General’s Walker, who said his team has been talking with asset allocators about investment options that are “less correlated to Brexit.” Regional offices outside London and real estate assets in the logistics, student accommodation, healthcare and build-to-rent sectors are now more attractive as they show “a lower correlation from a yield perspective,” he said.
Concern about London property is shared among other investors.
“We have done very little in central London,” Jon Rickert, investment director of GAM’s real estate finance team, said in a phone interview. “We feel there is probably more downside risk than upside risk, although we still feel good about regional markets in the U.K., where there hasn’t been as much development and yields are much wider.”