UK election: Increased lender caution expected

Prime Minister Theresa May forms a minority government following a deal to ensure the support of Northern Ireland’s Democratic Unionist Party.

The Conservative government’s failure to secure an outright victory in Thursday’s general election will add to a climate of uncertainty surrounding the UK’s property market, warned lenders and real estate investment managers.

At the time of publication, Prime Minister Theresa May had formed a minority government following a deal to ensure the support of Northern Ireland’s Democratic Unionist Party, essentially cementing what will be a weaker position for the Conservatives than was imagined when she called a snap election seven weeks ago.

From a lender’s perspective, Hayley Scott of Investec Structured Property Finance said the impact on sterling and inflation was of greatest concern.

“Today’s election result will have a major impact on the real estate market as well as the wider economic landscape,” she said. “Volatility and uncertainty may return to the sector. We expect sterling to initially fall sharply on the prospect of Brexit talks falling into turmoil, putting further pressure on currency-linked inflation as import prices continue to rise.”

Scott added that a number of proposed new construction projects could be put on hold as the property sector takes stock of the result. As a consequence, the banks would be cautious about financing new developments and real estate, as an asset class, could subsequently lose favour with institutional and overseas investors, she said.

Randeesh Sandhu, CEO of development finance specialist Urban Exposure, argued that, at least in the short term, the fundamentals supporting the UK’s housing market remain solid.

“Uncertainty is never good for markets and that’s the biggest negative from an economic and real estate market perspective,” commented Sandhu. “On the flip side, the weakening of sterling will again, like after the Brexit vote, potentially provide a currency boost for overseas property investors.”

However, the suggestion that the result, which saw significant gains for the Labour Party, may point to a ‘softer’ Brexit is also a potential boon to the real estate industry, Sandhu continued.

“Even yesterday we were hearing contradictory views on why Theresa May called the election in the first place and what a stronger than expected Labour performance might mean,” he said. “Did Theresa May want to strengthen her negotiating position to allow her more room to argue for a softer or harder Brexit? Would a resurgent Labour be damaging through higher taxes or provide buying opportunities via increased volatility? It’s clearly too early to fully analyse the result and its impact, but we remain confident on the fundamentals of the UK property market.”

The last two years have been a “crash course in living and doing business in a highly uncertain political environment”, said Peter Cosmetatos, chief executive of the Commercial Real Estate Finance Council Europe.

“This strangely winnerless election outcome was just the latest reminder that we can take nothing for granted,” he commented.

“For many senior lenders, the reaction is likely to be increased caution as regards the UK market. For the more flexible and adventurous, there will be many opportunities, both in a mainstream market likely to be affected by renewed sterling weakness, and in emerging sectors like build-to-rent, which should be relatively unaffected. As for Brexit, it just keeps getting weirder.”

The outcome has led private real estate investment managers to repeat the warnings that followed last year’s referendum vote by the UK on its membership in European Union. However, some predicted this latest political event will prompt opportunistic buying by those more comfortable with higher risk.

Jos Short, founder of London-based private real estate fund management firm Internos, said US investors had already labelled the UK a less appealing property marketplace. “I get the feeling that the US players, even though they can be pretty gung-ho and tend to dominate the opportunistic world, in times of uncertainty they are actually very thoughtful and quite cautious,” he said.

“We met with a US investor this morning and they said it made the UK look less attractive, but was good for continental Europe. It is also likely to mean a softer Brexit. The key indices to watch are leasing momentum and deals getting done and at what level.”

Short pointed to the stock market for signs of the first tangible impacts of the election result, specifically the UK’s housebuilders suffering share price losses. By 1pm, Barratt Development shares were down 2.6 percent, Taylor Wimpey down 2.23 percent and Persimmon Homes down 2.1 percent. The country’s commercial property REITs also saw value wiped from their market capitalisations. Notable fallers were Land Securities, down 1.7 percent, and British Land, down 1.5 percent.

“There is a question mark whether UK asset values are going to fall because of [the pound] weakening,” Short added. “If you buy the currency argument as a reason for buying real estate because it looks cheap, if you are dollar denominated then the capital side of the equation may hold up.”

Carol Hopper, real estate partner at City of London law firm Ropes & Gray, said the result could lead to opportunity for higher-risk players, as well as a property value adjustment. “This result may well lead to a market correction, which could increase deal activity as investors look to sell positions and opportunistic buyers selectively look to take advantage of that,” she said.

But an opportunistic market was precisely the outcome that UK-focused property fund managers did not want. Dominic Rossi, global chief investment officer at the real estate platform of asset manager Fidelity International, said the election provided “the result markets feared.”

“Markets were wrongly positioned, and international confidence in the UK will suffer. Sterling is the first casualty. The uncertainty will put a lid on the UK equity market,” Rossi said. “The prospect of another election within the next few months, coupled with the Brexit negotiations which are more unpredictable than before, raises the risks for all investors in UK equities.”

However, Zachary Gauge at UBS Asset Management, Real Estate and Private Markets, urged executives in the sector to suspend judgments until the dust settles on the result. “I think we’ve learnt from other recent surprise results that the short-term impact of political events on the real estate markets can be heavily overstated. Liquid financial markets react very quickly to news, but real estate tends to be much more stable and will continue to be driven by the underlying fundamentals,” said Gauge.

“But, in terms of longer-term impacts, the Brexit negotiations clearly have the potential to impact the underlying fundamentals of the UK real estate market. And whatever the outcome of internal negotiations and potentially another general election late in the summer, the strength of the negotiating position of the next UK government has clearly taken a set-back by this result.”