The UK’s property investment community gathered for their annual dinner in London last night and around the tables and in the bar there was just one topic of conversation. In surprising contrast, the person who stood out because he didn’t mention the country’s historic vote to leave the European Union was the guest speaker and prominent Brexit supporter, Luke Johnson.
Bizarre? Or understandable faced with a speaking engagement to a room of 850 people where the majority clearly held the opposite view? Johnson went up to the lectern, read a speech about how he ran his private equity business and left. Afterwards, someone who had spoken to him during the dinner said the businessman had not expected a leave vote.
The Investment Property Forum said Johnson had been booked because the membership had wanted to hear from an entrepreneur and it had been agreed last Friday that the speaker would stick to his original script.
Risk Capital Partners, the business the former Pizza Express owner co-founded in 2001, looks to acquire companies that it can double in size, tripling its own return through also adding leverage, Johnson said. Right now, the world was awash with capital and it was a time to be cautious.
“Capital is the cheapest I’ve ever known it. We were offered revolving money with no covenants, to buy euro-denominated assets, at 0.5 percent. It’s quite scary.” He added: “I doubt interest rates will rise for some time to come. Clearly it’s an interesting time, but it probably pays to be relatively cautious with so much capital floating around.”
There was caution evident everywhere at the dinner. Valuers aren’t marking down values, but then there isn’t any evidence. With investment deals in the pipeline but no clarity on how many will go through, one valuer said the numbers hadn’t moved. But there would be some opportunistic buying and when that starts, the evidence will emerge.
A (non-bank) lender said it was like 2009 again. His controversial observation was that banks were already proving unreliable for a second time, reining in liquidity and hamstrung by their short-term funding.
With the fall in gilts and swaps, there are investors interested in refinancing off the even lower rates. But maybe lenders will not be offering lower pricing. One said that they, like other lenders, have to decide how much risk has now gone up and how to price it. With valuations hard to get, some lenders may struggle to underwrite deals. In any case, the signs are overwhelmingly that the UK will be in an even more prolonged ‘lower-for-longer’ interest rate environment, so there is little need for borrowers considering refinancing to rush. Most who needed to had already done it before the referendum.
A widespread talking point was costs and keeping a lid on them for now. Plans put in place when a different referendum outcome was hoped for, even expected, are being reviewed. One IPF member said a hire they had expected to make shortly will now be considered carefully. In a lower volume market, firms will not take on anyone who cannot contribute to an increase in business.