Reasons to keep calm, post-Brexit

Many expect a ‘Brexit bounce’ in UK property investment. But real estate finance professionals are unlikely to get carried away.

Now that the UK is officially out of the European Union, many in the commercial real estate industry are predicting a surge in investment activity. They argue that buyers that held off during 2019, due to political uncertainty, will find renewed confidence to put UK transactions in front of their investment committees.

Consultancy JLL reckons the feelgood factor of having had a general election followed by the UK’s formal exit from the EU might contribute to £55 billion (€65 billion) of real estate investment in the country in 2020 – a 17 percent rise on last year’s total. We have already seen signs of yield compression in prime City of London office space: another consultancy, Knight Frank, last month reported a guide yield of 4 percent, a tightening from the 4-4.25 percent reported in December.

However, amid the excitement of a ‘Brexit bounce’, real estate finance specialists need to keep cool heads.

Some in the debt space have expressed concern that the perceived reduction in Brexit-related risk will encourage exuberant investors to pile into the prime UK market. Landlords may be tempted to offload non-strategic properties in the knowledge that buyers with varying degrees of experience in the sector are on the hunt for assets.

When yields tighten, some seek additional leverage to prop up return expectations. However, lenders should exercise caution as they structure loans in the early part of this year. The Brexit relief rally is unlikely to last into the second half of 2020 and even a moderate widening of property yields could lead to an increase in loan-to-value ratios.

Despite UK Prime Minister Boris Johnson’s claims, Brexit is far from “done”. The shape of the UK’s relationship with the EU – a major factor in the country’s future prosperity – needs to be hammered out by the end of the transition period on 31 December. This is a crucial deadline, and it will be preceded by great uncertainty. The Brexit ‘bounce’ may give way to caution in the market during the second half of the year.

Property finance professionals are likely to keep a sense of perspective as the nitty gritty of Brexit plays out. Although most accept that the UK’s departure from the EU poses a challenge, Brexit will form only one part of a wider assessment of risk in the lending market. Many regard the challenges of providing finance in a late-cycle market and underwriting real estate amid fundamental changes to the way property is used as the biggest issues they are likely to face.

Brexit has had an impact on the liquidity of real estate finance in the UK since 2016, though the impact has been minimal. Some German banks have pulled back from the UK, citing concerns about Brexit. However, more lenders than ever are supplying debt to UK real estate, with City, University of London’s Cass Business School reporting financing volumes of £23 billion in H1 2019 – a 4 percent rise on the first half of 2018, notwithstanding the reduction in investment activity.

The uncertainty surrounding the UK’s exit from the EU will remain a headwind for the country’s real estate market this year, and probably beyond then. However, property debt specialists have been operating amid such uncertainty since 2016. Although Brexit risk remains very real, lenders and borrowers in the UK property market are used to dealing with it.

Email the author: daniel.c@peimedia.com