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November 7, 2017

After the upheaval of the Brexit referendum result and the uncertainty it unleashed, we entered 2017 with a fair degree of trepidation about the prospects for the UK real estate market. Instead, it has been a year of surprises, with UK commercial transaction volumes expected to reach approximately £50 billion by the end of the year, a rise of more than 15 percent on 2016.

“Such strong performance in the face of continued political upheaval and economic uncertainty demonstrates a long-term investor commitment and confidence in the UK real estate market,” says Alistair Meadows, Head of Capital Markets in the UK with JLL. “That is especially true of international investors, which account for around half the total volumes across the country, and 80 percent or more of those in London.”

Asian inflows
Hong Kong and mainland Chinese investors in particular have grabbed the headlines this year. They have been the most active in the UK market, most notably in the London office sector, where landmark transactions included the £1.3 billion acquisition of the Walkie Talkie building by Hong Kong food conglomerate Lee Kum Kee, and Hong Kong-listed CC Land’s £1.15 billion deal for the Cheesegrater.

“The capital coming in from Hong Kong is a combination of private family money that is seeking to diversify and invest outside the territory, and mainland Chinese money that has been channeled through Hong Kong,” says Meadows. “And while some capital controls have been introduced that will likely moderate the flow of capital from mainland China, suggesting volumes may be lower going forwards, we believe this trend is set to continue.”

Another theme for this year has been the continued presence of German investors, with the likes of Deutsche Asset Management, Union Investment and Deka Immobilien making significant acquisitions in London.

“Over the course of the last decade, German funds have been consistently one of the largest global investors,” notes Meadows. “That they’ve been active in the market again this year is a further vote of confidence, especially in the London market.”

It is a similar picture among other international investors, with sovereign wealth funds such as GIC, and various Canadian pension funds such as CPPIB, all adding to their UK holdings. “So it is a truly global mix of capital sources investing in the UK,” says Meadows.

Fundamental attractions
Why is that, given the increasingly muted economic backdrop and ongoing uncertainty surrounding the end shape of the Brexit negotiations?

For Asian investors, one reason the UK remains a primary investment focus is the historic links and resulting familiarity. The country’s robust legal system, market transparency and sterling’s post-Brexit depreciation are other factors. Transport and infrastructure improvements, notably the arrival of Crossrail next year, will also give a boost to various areas of London.

A more fundamental driver influencing investor sentiment and the UK’s outlook though is demographics.

“We’re seeing both domestic and international investors looking at sectors such as retirement living, healthcare, student housing and build-to-rent as areas of investment opportunity that offer value, and prospectively sustainable and resilient income streams,” says Meadows.

The attractiveness of the alternatives sector as a whole means that by the end of this year it will make up roughly 30 percent of the commercial market in the UK. Within that, student housing continues to lead the way.

“The UK has a strong and globally-recognized offering in education,” notes Meadows. “Against this backdrop, student housing has continued to attract robust demand.”

Will it continue?
Going into next year, sources of occupier demand and investor interest across different industries will be under the microscope. Whether 2018 can surprise on the upside like this year is difficult to see in light of the continued and unabated political and economic headwinds.

Political uncertainty remains the biggest threat,” says Meadows. “Certainty or uncertainty has a domino effect that can influence both property occupiers and investors. And there are some big question marks over how the Brexit negotiations will unfold, especially in relation to migration and skilled labor, which have a major impact on the UK’s construction and service industries.”

Faced with this post-Brexit ambiguity, businesses have been deferring location decisions. But that can’t continue. In some cases, firms are already implementing plans to move parts of their existing UK operations abroad.

“It will certainly be challenging for investment volumes to grow a further 15 to 20 percent in 2018,” concludes Meadows. “Nevertheless, the fact that long-term institutional global capital has continued to invest in the UK this year despite the uncertainty bodes well for the future.”

Click here to read more on Brexit and its impact on commercial real estate investment.

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Alistair Meadows

Head of UK Capital Markets, JLL

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