UK property debt market resilient despite Brexit

Real estate activity in the country remains strong on bullish demand for London core assets from overseas players, argued lender panellists at the recent LMA’s Syndicated Loans conference.

UK real estate investment and lending activity remains resilient more than a year after the Brexit vote, as London attracts overseas investors who are benefiting from the cheaper pound and less competition from other buyers.

This was one of the main conclusions drawn at the Loan Market Association’s Syndicated Loans conference held on 19 September in London, where real estate finance executives discussed the current state of the UK property market and the impact of Brexit for lenders.

“UK real estate as an asset class is an investment that traditionally has been very resilient and certainly seems to have continued to attract a significant amount of liquidity in the market,” said Sebastién Marcelin-Rice, partner at Baker McKenzie, who chaired the panel discussion.

Although uncertainty remains following the referendum to leave the EU, confidence in the UK is starting to return, particularly in the London office market, said Arron Taggart, director at Cheyne Capital.

“A lot of capital has been deployed in more stable assets and I think that is a consequence of Brexit at the moment. If you have now an asset with low risk, you can get very cheap funding on very good terms,” Taggart said.

The fall in the value of sterling has attracted overseas buyers, with Asian investors behind some mega-deals for trophy assets in London, including Hong Kong’s CC Land buying the Cheesegrater skyscraper for £1.15 billion in May and, two months later, Lee Kum Kee’s purchase of the Walkie Talkie building for £1.28 billion, in the UK’s biggest deal for a single office building.

“We’re seeing asset allocations from overseas capital mainly into highly liquid core long-dated trophy real estate assets in central London,” said Craig Prosser, director at LBBW Real Estate Finance.

Foreign investors have been looking at commercial real estate in the UK capital not only because of the currency and liquid play, Prosser explained, but also due to the market’s affordability: the most expensive CRE market is Hong Kong, followed by Singapore, Manhattan and then London.

Prosser noted that, following the Brexit vote, LBBW planned to syndicate around £200 million of loans across two prime trophy assets – the Aldgate and Salesforce towers – in central London.

“We saw liquidity dry up during our syndication phase for a relatively short period of time – one or two months – but then we saw a huge number of new banks coming into the market, very keen to deploy liquidity into commercial real estate loans. And these players, largely from overseas, were keenly looking at prime office CRE loans, very well structured, very well underwritten to great sponsors in great locations,” Prosser said.

David Phythian, UK head of real estate at HSBC, also noted the increased interest from overseas investors long on cash who took advantage of high sale activity from retail funds following the Brexit vote.

“Recently, we have seen quite a few foreign investors in the market and our existing customer base has taken advantage of opportunities,” Phythian said.

“We have been approached by several clients wanting to buy reasonably sized buildings asking us to do the underwriting through syndication and, in several cases, we have been receptive, but in commercial banking we have ended up not needing to underwrite.

“With the early overseas buyers, we found that they decided to bring their domestic lenders in because, strategically, it works for them. Where we have taken a large position on a loan, we have been approached by other banks interested in buying a part.”

HSBC has been well-placed to capitalise on the wave of Asian investment into the UK, as the bank has an extensive network and history in Asia-Pacific, while being headquartered in London. The prime example was the joint £644 million financing of the Cheesegrater building in June, alongside ING and Bank of China.

Panelists agreed that the UK market is currently seeing appetite for syndications and large tickets, although real estate players are still cautious both on investment and lending.

Cyrus Korat, partner at DRC Capital, noted that Brexit is only one of the multiple influences in the market.

“The reality is that the property market values went up rapidly after the financial crisis, with 2015 and 2016 being the final years. I think it has come to a natural slowing down anyway, regardless of Brexit,” Korat said.