Brexit: Weathering the Storm
The Brexit result in June 2016 shook not just the UK but the world, particularly Britain’s European neighbours and the referendum has indeed brought a melting pot of issues to consider. We watched the Sterling tumble to record lows, the lowest levels seen in the last 30 years in fact, quickly followed by a flurry of foreign investment into the UK off the back of the weaker pound.
But what impact has there been on UK real estate?
In the short term the UK’s vote to leave the EU has not had a significant impact on the real estate sector, despite some immediate effects on real estate mutual funds and real estate investment trusts (REITs). One important reason is the long-term nature of real estate investments.
Unit redemptions, from property mutual funds and REITs, following the vote increased to such an extent that by the beginning of July 2016, several real estate funds with a joint volume of approximately £18 billion ($23.57 billion) froze withdrawals, according to Bloomberg. This was a result of increased redemptions and panic selling, highlighting the importance of a long-term mentality for real estate investments as well as the age old lesson to “not put all your eggs in one basket”.
So how have we protected ourselves?
At Berkeley, our UK assets are spread across multiple sectors, including real estate, hospitality, technology & logistics. As a private equity firm, we have managed our underlying businesses as a natural hedge against the weaker pound and this underlines the importance of having tangible businesses to manage within real estate. They have certainly aided us in a period of volatility and allowed us to drive yield in the wake of Brexit.
“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” — Franklin D. Roosevelt, US President
Since Brexit, private equity investors and overseas pension and sovereign wealth funds have acquired properties in the UK due to the favourable exchange rates. It is boom time for commercial property investment in London, with total investment hitting £12.03 billion ($15.75 billion) in the six months to June 2017, according to figures from commercial estate agents CBRE, marking a 24% increase on the same point the year before.
One of the fears of Brexit was that large corporations would close up shop and move their headquarters overseas, but has that really been the case?
In the longer term, UK inflation is expected to rise because of Brexit, so investors have already begun to plan against that as property is traditionally seen as a good hedge against inflation. Furthermore, companies have already committed to London for the early 2020s, with notable deals such as the German investment banking juggernaut, Deutsche Bank, committing to their new headquarters in the City.
At present, Brexit hasn’t affected the key fundamentals of the robust UK real estate market too detrimentally, but it has increased the volume of foreign buyers. At Berkeley, this has certainly been a factor when choosing which currencies we raise capital in.