When the vote to leave the EU was cast, the real estate industry was affected more than most. But who stands to benefit?
What could have been a royal flush may in fact turn out to be just a pair of twos, as the UK took a gamble in June, voting to leave the EU when everyone, from presidents to industry experts, was telling it to stay. Now, as far as real estate is concerned, it’s unclear who will ultimately claim the pot.
Since the EU referendum, the US has been playing hide and seek with an equally unpredictable future looming after its presidential election, while the rest of Europe is refusing to submit to a domino effect, staying relatively stable throughout the summer.
But in the UK itself, the pressure has started to show, with highprofile fund managers including Standard Life, Aviva and M&G suspending their property funds just a week after the vote to exit the EU due to a surge in requests to redeem investments.
Indicative of their reasoning was this quote from an Aviva spokesperson, who said in early July: “We have acted to safeguard the interests of all our investors by suspending dealing in the fund with immediate effect. Suspension of dealing will give Aviva Investors greater control in managing cash flows and conducting orderly asset sales in order to meet our obligations to investors wishing to redeem their holdings.”
This seems like a sensible course of action. As Aberdeen Asset Management pointed out in August in a briefing note on open-ended property funds following the so-called Brexit vote, it’s crucial to treat customers and redemptions fairly, even if the sale of an individual asset becomes higher or lower than the valuation suggested. For example, Aberdeen Asset Management’s briefing explained, if a sales price is below the valuation, then the fund generates a deficit but the redeeming investor isn’t asked to top up the fund. The briefing suggested that fund managers need to sell a range of assets to treat those remaining in the fund and those exiting it equally. The quality and pricing of the assets in the fund after redemptions need to be as close as possible to those before the redemptions.
Winners and losers
Any major event brings winners and losers, of course. Following the referendum, Canada was seen as the immediate winner. Anita Springate-Renaud, owner of Engel & Völkers Toronto Don Mills, said in early July: “It remains to be seen how these low interest rates and increased property values will affect Toronto and Vancouver’s already ‘hot’ housing markets when we add more prospective buyers to the mix. However, the general consensus is that Canada is viewed as a top-of-mind investment choice which demonstrates trust and stability in our economy and industries.”
On the other hand, the US is currently advertising stability and liquidity on its lands.
Simon Calton, CEO of Rycal Group, says: “We are seeing more people looking to invest in the US in products and real estate, and we personally have seen more movement towards the US.”
He adds, however, that the impact of Brexit on the UK real estate market in the long run is yet to be seen.
Brad Case, senior vice president of research and industry information at the National Association of Real Estate Investment Trusts, goes further: “I think Brexit is going to have a long-term effect but not necessarily a big one. However, I do think London values were inflated as well as New York real estate assets that are privately held.”
Dr Sam Chandan, real estate economist associate dean of the New York University School of Professional Studies Schack Institute of Real Estate, suggests that the initial turmoil experienced in real estate markets was a snap reaction, not reflective of what the markets will look like in the long term.
Chandan explains: “American investors were anticipating that the UK would vote to remain in the EU, so there was an initial surprise. Some investors sought to withdraw capital from the UK. As a result, redemptions from funds principally focused on UK real estate were placed on hold.”
The house doesn’t always win
Not all was negative for the UK in the aftermath of the Brexit vote.
The time had come for investors who had been waiting for a drop in the value of pound sterling.
Case comments: “The motivation of private equity real estate managers is to put their clients money to work, because they will get criticised if they sit on it. So there are a lot of people who are responding to motivation other than total return maximisation.”
“So if you are the one who is in the position to maximise total returns and are in a position to take advantage of the fact that other people are not, then you can deliver higher value to your investors.”
He adds: “What we have seen so far is in the days following the Brexit vote there was a very sharp movement. The market for all assets around the world went down but the markets in the US and Asia recovered very quickly, while the UK and Europe haven’t fully recovered.”
As a result of the Brexit vote and the fall in sterling, the Bank of England cut interest rates from 0.5 percent to 0.25 percent.
The Bank of England Monetary Policy Committee voted unanimously and also passed a package of measures designed to provide additional support to growth in order to bring a total stock asset purchase of $435 billion.
However, at the time, Naomi Heaton, CEO of London Central Portfolio (LCP), reassured investors, saying that in Central London, a market where, generally, investors are not reliant on credit, “the cut is unlikely to have any notable impact”.
Heaton added: “Since the Brexit vote, LCP has continued to receive investment mandates from clients who still see prime central London as an investment location of choice and wish to take opportunistic advantage of the depreciation in sterling.”
The next roll of the dice
Chandan suggests the future negotiations between the UK and the EU will define the UK’s real estate market and will determine whether or not London will remain the financial capital of Europe.
Where there are winners, there must be losers. This game is far from finished and it is coming to the point where players must place their cards on the table.
Calton concludes: “Even if the UK manages to recover over the next couple of years, which is very likely, we will then look at the fall of the EU.”