Brexit might be dominating headlines in the UK now, but the political uncertainty isn’t deterring international investors who are taking a longer-term view as they look to increase their global real estate allocations.
Following a strong 2018, which saw 79 percent of all Central London real estate acquisitions made by international investors, according to JLL figures, the UK is set to remain a favourite destination for global capital in 2019.
“Throughout 2017 and 2018, investment volumes surprised on the upside and the UK has maintained its resilience,” says Alistair Meadows, JLL’s head of UK Capital Markets, adding that “global investors tend to think long term and are not as preoccupied with Brexit.”
JLL predicts that overall investments into UK commercial property will be around £55 billion, with international investors continuing to target prime real estate.
However, with more short-term uncertainty and volatility as politicians seek consensus on a Brexit agreement, investors could face a fluctuating British pound for months to come.
“It’s unlikely there’ll be a no-deal Brexit,” says Jon Neale, JLL’s head of UK Research. “Nevertheless, the uncertainty will delay and complicate some investor decision making.”
If a deal is struck, he believes there will be a revival, which will see the pound strengthen against the dollar. While, Bank of England base rates will rise to 1 percent after any agreement, possibly rising again towards the end of the year and gilt yields and swap rates will also move upwards.
However, Neale says a no-deal Brexit, would lead to a slump in the pound, which could, in due course, attract overseas investors looking for a bargain.
Yet despite the current Brexit drama, it’s not the only factor on the minds of real estate investors looking at the UK in 2019, according to JLL’s 2019 UK Property Predictions report. They’ll also be assessing the challenges and opportunities of shifting space requirements, particularly in the office market, and the impact of new technologies – as well as the ongoing high demand for quality assets in a tight market.
Increased global allocations
Many of the world’s top 100 investors are under pressure to rectify their below-average real estate allocations, given the higher yields found in the sector. If they all brought allocations up to 10 percent, it could result in another US$700 billion flowing into real estate markets worldwide.
Neale says the UK continues to see the “strongest cross-border inflows of any market” and believes allocations directed at UK real estate will only become more imposing. The UK’s economy is forecast to grow 1.7 percent in 2019, up from a disappointing 1.3 percent in 2018, assuming a Brexit deal is reached, JLL’s report says.
However, inflows will likely be targeted at prime assets, in key locations – such as the central London office market – which are in short supply.
New ways to access markets
Limited supply means many investors will need to find alternative ways to access markets. “Brexit may well lead to a few more forced sellers on the market, but with LTVs and debt low, and more international owners than before the Global Financial Crisis, this is likely to be limited,” says Meadows.
“Investors may have to look at alternative ways to access the market – M&A or platform acquisitions, or routes such as debt funds.”
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