Let’s be honest, the markets were starting to look increasingly toppy well before Brexit became the central topic of conversation in our industry and the wider populous; you need an encyclopaedic memory to remember the last time we were the third item on News at Ten. The data shows that the market peaked in 2015 and as capital growth stalled the focus shifted to yield.
The agency community had a stellar 2015, with investment volumes peaking at £70bn-plus and bonus packages at a level last seen before the global financial crisis. These bonuses have been/will be paid during 2016 and, dare I say, the Brexit vote and summer arrived at just the right time for that well-deserved long holiday, because nothing much was going to happen until people had clarity on where values were going to stabilise – why buy when it may be 10% cheaper tomorrow?
However, this generalisation ignores the headline-grabbing news of “gating” of the open-ended funds (representing only 5% to 7% of the investible universe). The successful sales and the depth and number of bids received for the assets unexpectedly offered, and the negligible discounts received to reflect the short transaction timescale, were not so well reported, but this vividly illustrates the interest from investors in UK real estate.
Overseas investment was already flowing into the gateway cities pre-referendum, but this will be supercharged by the currency advantages. Albeit I suspect that with Wall Street talking about a rate of $1.20 to the pound, the prospect of further weakening of the pound/dollar could delay activity until later in the year or beginning of 2017.
The base rate reduction to 0.25% – the lowest level in 300 years – 10-year gilts at historic lows, and a £60bn injection into the quantitative easing programme all underpin greater domestic and overseas demand for real assets with an attractive interest coupon. The arrival of the Global Industry Classification Standard on 1 September sees real estate elevated from its current position under financials to the 11th sector – we have finally come of age.
From a capital markets perspective, all this is very positive for real estate and a busy September for the agency community looks in prospect, but for the fact of the sentiment impact to the all-important occupier.
The early August indices from the PMI, services and construction sectors were all negative, and it is more than likely that occupational decisions will be put on hold pending Phillip Hammond’s Autumn Statement in November. The tone and content of this statement, combined with the further development of the Brexit discussions, will be critical to future investment decisions.
The above factors influencing the capital and occupier players will limit the amount of investment product on the market in September; the headlines of a commercial property market in crisis will give way to political headlines and the real money will be made by those experienced real estate entrepreneurs who will take advantage of the differing opinions on prospects leveraged by loads of overseas money. There will be some big deals, but the volume business is unlikely to return quickly.
The case for real estate investment in the UK has never been stronger. Indeed, it was one of the reasons why I decided to join the board of IPSX, a new regulated securities exchange for real estate which provides an opportunity for the retail investor to gain a yield from a real asset at a time when any return from capital is virtually non-existent. The application to the FCA has been made and we are looking to offer the first IPOs in Q1 2017.
Markets are all about sentiment and there are many reasons why we should be positive about real estate, not least the variety of opinions meaning there are deals to be done.
Rob Bould is an independent consultant and former GVA chief executive
