With UK prime minister Theresa May poised to trigger Article 50 of the Lisbon Treaty, formally marking the two-year exit process from the EU, Colliers, in its In the Balance report, unveiled at MIPIM in Cannes, said it believes EU fragmentation and US economic policy could pose the biggest risks to the future of the UK commercial property sector.
At present, the report said the UK market is being buoyed by powerful macro factors such as the sheer weight of global capital seeking yield, global demographics enlarging pension pots, low interest rates and low bond yields.
In 2016, the report said, total global direct commercial property investment amounted to £960 billion ($1.17 trillion; €1.01 trillion) of which the UK benefited from £50 billion, 30 percent down on 2015, but £5 billion above the 10-year average. Next year, Colliers has predicted that UK investment will reach the 10-year average of £45 billion and should match 2016’s performance.
Richard Divall, head of cross border capital markets, EMEA at Colliers International, said the most remarkable feature of Brexit has been its limited impact on UK occupier markets.
“Net absorption data for London suggests that occupier markets have only marginally weakened, and much of this can be linked to the banking and finance sectors who were already in the process of downsizing expensive Central London exposures by ‘north shoring’ back office functions,” Divall added.
Despite the substantial forces supporting global real estate, in general, and UK real estate, in particular, there are numerous risks that shape the views of even long-term property investors explained Walter Boettcher, chief economist at Colliers International and the author of the report.
“In the UK, media attention has been centered primarily on ‘Brexit,'” said Boettcher. “But this risk to investors is a small part of a much larger risk of wider EU fragmentation and new Eurozone instabilities. Growing nationalism in key countries such as France, Italy, and the Netherlands, among others, poses large risks to Tusk’s mission to push forward EU political unity,” he added.
Of equal, if not greater risk to the UK property market, said Divall, is the ‘unknown’ of US domestic and international policies. “The potential for global capital diversion to the US is substantial given the possibility of new protectionist trade policies, deregulation of US financial markets, new corporate-friendly tax policies and a much-anticipated fiscal stimulus linked to large-scale infrastructure investment,” added Divall.
These initiatives have the potential to absorb a sum equal to the total of all global institutional funds presently allocated to global real estate, which according to Colliers’ report is approximately $5 trillion.
“The bigger question is whether US foreign policy will enhance access to global capital pools or restrict access,” said Divall. “The evidence, so far, suggests the latter and that prime markets in the UK and other parts of the world are likely to be beneficiaries,” he added.