Brexit Still Casting Shadow over London's Commercial Property Sector
75 Percent of London office transactions involve overseas buyers in 2017
According to international law firm CMS's new research report UK Real Estate - Smart Healthy Agile, 29 percent of real estate professionals are now feeling optimistic about UK's commercial real estate market.
In last year's survey, just before the Brexit vote, only 14% of respondents were feeling optimistic, so the sentiment has doubled in the last 12 months. In fact, 63% were pessimistic in 2016 versus just 23% now.
Research was conducted by FTI Consulting on behalf of CMS in July 2017 with 350 real estate investors, developers and agents, controlling combined assets of over £400bn.
Ciaran Carvalho, Head of Real Estate at CMS UK said, "Optimism about the commercial real estate market remains subdued but the level of pessimism has fallen dramatically and this perhaps indicates that in spite of an ongoing sense of uncertainty around Brexit, investors have recovered from the initial shock of the leave vote and have started to look to the future with greater confidence.
"The London market has continued to heat up notwithstanding Brexit, with over 70 per cent of professionals we polled believing it is overpriced. However, we have not seen the price correction that many domestic investors had hoped for. Transaction volumes in London have been steady over the past year with a string of high profile acquisitions and no sign yet of the exodus from the City that many predicted."
CMS has been involved in real estate deals with Chinese investors with a cumulative value of more than £4bn over the past 12 months and international capital continues to buoy the UK market, with the depreciation in sterling after the EU referendum no doubt enticing global investors. Time zones, transparency of markets, and the respect for the rule of law in the UK remain factors attracting international investment."
In London, 75% of all office transactions in Q1 2017 involved overseas buyers, and of those 90% were Chinese investors. So it is not surprising that 80% respondents believe Asian investment will continue to increase over the next two years, up from 66% last year. Capital from the Middle East (61%) is second in the poll, up 15% from last year.
With uncertainty surrounding the UK's place in Europe, real estate professionals think Western European investment in UK real estate will continue to falter; this region is down by half from 22% to 11%.
Outside of London, Dublin (56%) and Frankfurt (45%) are the European cities which respondents felt were the most appealing as investment prospects in the next 12 months, with Berlin (38%) and Paris (36%) next in line.
Carvalho continued, "Brexit has raised the threat of certain companies moving all or part of their workforce into the Eurozone after the UK formally breaks its ties with Europe. The pressure is particularly acute in financial services. In light of this, many European cities are positioning themselves to benefit and whilst this is no time for complacency, so far there is still no real evidence that they are threatening London as a major international marketplace and an important global city."
The rise of ecommerce, out-of-town shopping and the decline of the traditional high street, has transformed the landscape of the UK real estate market over the past decade or so. This has led our sector respondents once again to name distribution and logistics as the most appealing asset class, up 10% to 74% from 2016, and double what it was in 2013. It is often described as the 'darling' of the sector thanks to high yields and strong growth forecasts.
Conversely, the appeal of offices has fallen by 13% from 2016 to 2017, leaving this asset class lagging in fifth place. This may in part be down to some of the disruptive forces emerging in the world of offices. There is a growing sense that in order to remain relevant, offices must change. Retail has been going through massive disruption for some time and sits bottom of the asset class of choice table with just 18%. But those destinations which have evolved to provide 'experiential retail' are bucking the downward trend. The CMS report highlights the rise of the experiential office, a response to the technological and social pressures that are blurring the lines between work, home and leisure spaces.