Deka, the German investors, decided now was the perfect time to splurge £164m on buying a Manchester office block.
And it was not alone in taking a sunny view of the British summer. Unemployment has, against all expectations, fallen by 54,000; retail spending is up by 1.4%, and the low
value of the pound is encouraging tourists (and property investors) to flood into Britain. For a country barely two months into uncharted political and economic waters, things look surprisingly good.
Around the regions, the mood is a kind of semi-stunned surprise that – fingers crossed, hope this is not a dream – the property market is still functioning. Indeed, in many respects, it is doing just fine. In Bristol, an overseas investor in pre-Brexit vote talks to buy 29,000 sq ft of out-of-town offices pressed on regardless – and the properties, including a unit at Aztec West, changed hands for just under £7.2m.
“We had three deals straddle the Brexit vote, none fell out of bed, and there was no price chipping after the vote,” says Tim Davies, head of offices at Colliers International in Bristol. Pick up a phone and talk to agents in any UK city, and you will hear similar stories.
Long term, of course, nobody is taking any bets – but today, as business and political life resumes after the summer break, it feels, well, OK.
So have the UK regional property markets anything to fear in the aftermath of the EU referendum vote? Is it only London – with its financial services exposure and housing bubble – that needs to worry this side of the completion of Brexit talks in 2019 or 2020? Or is this the calm before the storm that breaks when Article 50 is triggered?
Ben Knight is a professor at Warwick Business School and an expert in UK economic forecasting. He warns that the data we have is poor, and mostly too late after the event to be useful.
“Because the worst has not happened since 23 June, some think things will be OK – but the consequences of the vote were never going to be short term,” he says. “So far all we know is that the pound is significantly down and interest rates are down, and inflation is a little up – all three are important, but if property people think that is grounds for optimism they are misleading themselves.”
Knight says regional variations depend on exposure to financial services, overseas investment and the relative strength (and potential for price correction) in regional housing markets – which in turn affect consumer spending. “Regional diversity is what we should expect – and for now my advice is to focus on the knowns, and not to get carried away,” he says.
The devaluation of the pound provides a useful post-Brexit stimulus for overseas investors like Deka – and for plenty of others, not least Chinese investor Sichuan Guodong Construction Group. The Brexit vote did not deter it from signing a £1bn funding agreement with Sheffield City Council. Late July saw it sign a 60-year deal, with up to £220m over the first three years alone in five yet-to-be-chosen city centre projects.
This is good news for Queensberry Real Estate, selected in pre-Brexit, early June to develop Sheffield’s long-delayed £480m retail quarter.
Queensberry commercial director Stuart Harris says he – like many in the regions – is taking a long-term view of short-term uncertainties. July’s cuts in interest rates, a new round of monetary easing and a fiscal stimulus should all have done their job steadying nerves and settling the economy by the time the Sheffield scheme is under construction.
“We will be delivering this project into the world of 2022, and if the economy is in the same state it is in now, in six years’ time, then we are all in trouble, not just us in Sheffield,” he laughs.
“We have been assured Brexit makes no difference to the funding for our scheme, but others with significant European funding may face a challenge. In six months, we will see if the devaluation of the pound has changed construction input prices – and retail inputs – and somebody is going to have to absorb those price increases. Logic says that if a scheme was vulnerable, then the next 24-36 months will make it more so – but then if it is vulnerable, developers should not have gone ahead anyway.”
Quadrant Estates’ managing director Christopher Daniel, whose team is busy in Swansea, Portsmouth, Glasgow and Colchester, says retail demand in the regions may be affected by changes in the post-Brexit London office market, which could in turn affect jobs and spending in the regional markets.
“This is definitely affecting the way we assess risk,” he says. “We do not yet have a feel for how demand will unfold and the obvious issue is financial services demand. That could have a knock-on for the service sector – will they continue to put offices into the UK regions? There is clearly potential for us all to lose an awful lot.”
Paul Coates, managing director for real estate at RBS, says he will be watching GDP figures and rental growth over the next few months. If regional property markets manage to deliver continued rental growth, he will be cheered.
“GDP growth is probably going to be the biggest influence on rental growth in the regions and, because yields have tightened in the regions, investors are looking to rental income – so rental matters. That might be about looking at incentives, not headline rents. It will be a key barometer for the regions,” he says.
Is this the calm before the storm? Coates is not sure. “Maybe we need to keep checking. Real estate goes through cycles, but is the Brexit vote the event that triggers a new cycle? I don’t know, it is too early to say.”
Like many lenders, he awaits with interest September’s news on revaluations for accounting purposes: “It will be interesting,” says Coates, playing it cool. “We will be watching.”
Currently, nobody knows what Brexit means and it is hard to separate out the risks it poses to the UK regions from the risks of a property cycle that was beginning to slow before the vote. Continued worries about the euro, China’s economy and a Trump win in the US presidential elections also help put Brexit fears in context.
“The truth is we have a lack of hard data – but the UK economy is not in a bad place, and we could still be a safe haven if world events go the wrong way,” says Walter Boettcher, director of research and forecasting at Colliers International. Its optimism, albeit of an alarming kind.
So no need for nightmares in Britain’s regional property markets – not yet.
What to watch for this autumn
Watch out for a raft of big regional infrastructure projects this autumn that could change the post-Brexit landscape.
But if the wrong projects are chosen – or are not deliverable – this could be the time to start worrying.
So says Walter Boettcher, chief economist at Colliers International.
“Mark Carney, governor of the Bank of England, has made it clear we have done monetary policy as a response to the Brexit vote – I am not sure it will be effective, but the upside is the government can now borrow to invest, and it is time for that kind of fiscal stimulus,” he says. “So watch the Conservative party conference in October because that is when we will start to see the new regional and investment policy take shape.”
Boettcher says he is looking for deliverable, scalable infrastructure projects in the regions that could help change their fortunes.
“I hope Lord Adonis’ Infrastructure Commission has got a list of them. We could push ahead with Heathrow or Gatwick – or both – and there could be a very positive story for the regions. But if they miss it, this is a once-in-a-generation opportunity. If we do not get those kind of announcements, then I am packing my bags because we need clear leadership here. The economy is not completely out of the woods.”
Expect to hear more on a Trans-Pennine tunnel, an Oxford-Cambridge highway and improvements to the A1 in the East of England.
Regional investment
Charlie Batten thinks Brexit makes the regions even more appealing. He has teamed up with Dan Dutton, formerly head of acquisitions at Commercial Estates Group, to form Regional Securities.
Although the company was registered pre-Brexit, it is channelling funds into £3m-£30m lots on the basis that uncertainty means opportunity.
“Some investors have paused their regional interests as they assess Brexit,” Batten says, “which means it is not as competitive. But in the long term, we really believe in the performance of regional economies.
“There has been talk about the London office market coming off the boil, but the occupational market in the regions still seems very positive – I suppose there are nerves about a possible time lag as the London trends spread to the regions.”
In the meantime, Batten expects to announce Regional Securities’ first deal soon. Manchester is said to be on its target list, and Manchester-based Mark Rawstron, regional senior director at Bilfinger GVA, thinks the company could be making a wise move. “Brexit impact will be felt more keenly in London and the South East so the regions could look more positive in the short term,” he says.
