UK commercial real estate investment resilient in the face of an imminent Brexit, says Colliers

Dr Walter Boettcher, UK chief economist, Colliers International

In 2018, the spectre of Brexit did little to discourage investment in UK commercial real estate and in 2019 ‘disciplined investors’ continue to see value a report by Colliers International has revealed.

Transactions for the first two months of 2019 totalled £5 billion ($6.6 billion). This lags behind the same period last year total of £9.2 billion ($12.1 billion) but purchases by cautious investors such as UK institutional funds (£1 billion) and UK REITs (£0.5 billion) suggests that the UK market is not driven by ‘irrational exuberance’ or ‘animal spirits’.

Instead, the market is supported by a surprisingly stable UK economy supported by favourable demographic growth, and balanced property market fundamentals that is also continuing to attract cross border investment by a weight of global capital in search of yield that continues to grow.

Cross border investment that totalled £1.7bn, continues to reflect a shift from leveraged short term investors targeting double digit internal rates of return (“IRR”) to equity-driven long-term investors looking for modest single digit returns based on income growth.

Walter Boettcher, Chief Economist, Colliers International, said: “You could forgive investors for taking a step back given the uncertainty created by Brexit and the fact that we are in the mature part of the property bull market. However, we had our late cycle Lehman-type moment back in mid-2016, and the UK property market has displayed a remarkable underlying stability linked to the same forces that have propped up the UK economy since the EU referendum. Favourable demographics over the next 5 to 10 years, will see the UK will outperform most other G7 countries, putting us in league with Canada or the US. Global demographic growth and aging will also assure that there is also no shortage of capital with allocations to property set to increase again this year. With sterling still down by 10% to 15% against its long-term value, the UK will continue to capture its share of global investment.

“The attractiveness of real estate is linked to whether property offers better value than other asset classes, such as bonds or equities. Although the average return decreased from 10.3% over the five years to 2017 to 8.2% in 2018, global real estate vastly exceeded the 10-year gilt rate. A 15% depreciation of sterling may have stimulated greater interest in UK property by cross border investors, but the origin of the capital is telling. So far in 2019, Asian investors look to have been supplanted by UK institutional investment despite fears of redemption pressure.”