A panel of Europe’s leading real estate experts identified political uncertainty across Europe as the biggest threat facing the property sector in 2019.
Struan Robertson, Chairman of Bank of America Merrill Lynch’s EMEA real estate business, summed up the mood at the EPRA Insight event in London on January 7 when he pointed to the spectre of Brexit. He said: “The hallmarks of 2019, at least in the first quarter, will be confusion and volatility. We have no idea how we are going to get out of this mess.”
Setting the scene, Valerie Guezi-Jacob, Property Analyst at Exane BNP Paribas, highlighted the Bank of England’s most recent stress tests, forecasting the worst Brexit outcome triggering a potential 48% fall in commercial property prices. Exane’s forecasts for REITs suggest a more modest 15% drop in capital values in the event of a no-deal Brexit.
But it was not all gloom. Guezi-Jacob said employment intentions for the business services sector were still positive and vacancy rates across London fell last year to well below long-term averages, demonstrating tight supply.
This might be expected to lead to more positive rental growth, but the forecast is for barely above zero. “Brexit anxiety is not the only factor,” said Guezi-Jacob, highlighting the growing trend towards flexible working. In March 2012 the average occupied floor space per office-based job in London was 110 ft2. “Today it is less than 94, and the shared workspace trend is expected to continue,” she said.
John Burns of Derwent London said he had been surprised by the resilience of the Central London market since the Brexit referendum. He said: “International companies are not discussing the problem of Brexit and want to settle here. We won’t get the stellar returns of three or four years ago, and rental growth will be limited, but space is letting quicker.”
Isabelle Scemama, CEO of AXA IM Real Assets, said the outcome of Brexit would affect her deployment of capital but reminded the audience that political uncertainty was not a uniquely British problem. She said: “When we look at continental Europe, we see the gilets jaunes in France who are pushing the government to postpone reforms. In Germany, we can question the pricing. Outside Europe, you have a trade war between the US and China. Uncertainty is coming from everywhere.”
On the topical issue of online shopping and its impact on retail real estate, David Atkins, Chief Executive of Hammerson, was bullish. He said: “I don’t want to sound in denial because it’s tough for all elements of retail, but we’re going to see that it’s about the quality of assets and management. Retailers still want the best venues they can find. Margins are under pressure and retailers are doing their best to shrink portfolios. However, the real cost they are facing is not rent but the cost of doing sales online.”
In the alternatives real estate space, Jonathan Murphy, CEO of primary health care investors Assura highlighted the strength of demand for modern community healthcare facilities. Paul Bridge, CEO of Civitas, gave a positive overview of the investment opportunities within social housing, which provides one-quarter of housing in the UK and has only recently been opened up to private investment.
Veteran John Burns summed up the EPRA Insight event with some timely advice: “When there is so much uncertainty, you have to put yourself in the best position you can. Make sure that if there is a correction, you can take advantage of it. Remain lowly geared and only buy what you can afford. That way, you can go home and put your head on your pillow!”