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For international investors seeking commercial real estate investments, developments and financing in the UK, Sian Huish outlines the UK and Jersey’s resilience to Brexit, and focuses on the longer term trends which have and will continue to impact upon market appetite and demand.
In the years since the UK’s vote to leave the EU, the commercial property sector has defied the gloomiest predictions about its future, although with some variance by property type.
The UK remains an attractive market for international businesses to set up office, retail and warehouse space. The country’s GDP and consumer spending have held at reasonable levels, and prestigious London postcodes continue to attract deep-pocketed buyers.
Of course, a closer look reveals a more complicated picture. Ignoring the trends behind the headlines could leave investors at serious risk.
For an accurate picture of the UK’s commercial real estate market and where it’s headed, it’s worth taking a step back from overwhelming Brexit and election coverage and take a wider view.
Commercial property in the UK is experiencing a time of significant change. Many of the pressures commercial investors are facing are the result of long-term trends, dating well before the 2016 referendum.
In the last decade, we have seen a major change to stamp duty, land tax updates in both 2014 and 2016 and, entering force this year, new rules and tax exemptions for non-domiciled investors.
Most recently, the introduction of the ‘PSOC Register’ – a register of People with Significant Control over Overseas Companies – arrived with the goal of ‘levelling the playing field’ between onshore and offshore investors. While this has forced a change in some strategies, it has also opened new doors.
Increasing unity on rules allows investors the freedom to choose the jurisdiction that suits them best. A level field means more investors can consider new options. Able to cater to investors in the UK and all over the world, the Channel Islands have long been a preferred choice for institutional and private property investors due to their reputation, robust regulation, administrative experience and, in many cases, tax neutral position. The Real Estate team at corporate services provider Hawksford continue to see Jersey entities and structures being utilised for UK real estate transactions.
Other long-term economic factors are also at play. Despite individual spikes, such as the one in response to the results of the UK’s general election – we have not seen a significant or sustained movement in the value of sterling due to Brexit fears. Certainly not to the extent where a big number of commercial properties suddenly became ‘too good to pass up.’
The relative stability of the pound over the past few years is not down to widespread confidence. The enthusiastic bounce and return pattern of the pound over the past few years is only adding to frustration and delays over all deal-making efforts.
Under these conditions, it may be a surprise how well the prices of commercial property have managed to hold up. Year-to-date growth for the commercial property sector is currently sitting at 1.9%, with office and industrial properties offsetting falls in commercial retail.i However, there is more going on behind this trend than is immediately evident.
The CBRE recently reported that Central London retail transactions for H1 were 20% down on the 5-year trend with only 24 transactions totalling £830m.ii A few – the sales of 311 Oxford Street and Kensington Arcade – were so large they served to significantly lift the overall average. The overall outlook for retail remains mired in anticipation of a ‘bottoming out’ in the market.
Though citing a number of commercial property sectors which have been defying any Brexit slow-down, Julian Ward of Savills noted recently that private investors are fixated on any areas with liquidity – somewhere they can ‘sell when necessary.’iii
Establishing reliable estimates for the value of commercial property you have or wish to buy has also been getting more difficult. Take, for example, the increasing number of retail businesses seeking Company Voluntary Arrangements (CVAs). These were introduced to help struggling companies continue trading while restructuring and ensure they pay their creditors. This should include landlords, but that has not been the case in practice. This can be seen in the legal challenge by Debenham’s landlords. Although it was unsuccessful in the court, it demonstrated the frustration of landlords, and a rise in claims that ‘landlord only‘ CVAs are unfairly prejudicial.
Significant uptake of this scheme in overall challenging market conditions has forced landlords to accept greater rent losses and having to reassess the value of their sites. On Wednesday 6 November, shopping centre owner Intu reported to investors a 9% drop in rent takings, which it attributed to a larger than expected number of CVAs from tenant businesses.iv
There will always be a range of factors which are crucial to understand in order to invest in UK commercial real estate, especially in retail. And while the uncertainty that Brexit is contributing to can be spotted as a recurring theme across all sectors, it hasn’t fully suppressed a sense of opportunity. Many pent up investors are waiting with bated breath for the next Brexit update, many pausing to strike property deals in 2020. The overarching sentiment from both local and foreign investors is one of resilient confidence and hopes for brighter days ahead.
Working in real estate investment demands long-term planning. It’s sobering to remember that whatever the first 100 days of a new UK government brings, the full process of negotiating the UK’s exit from the EU will ensure Brexit remains a factor to consider alongside every other trend for years to come.
The best approach for investors who wish to seize opportunity in the UK in 2020 and beyond is to keep Brexit in context and stay focused on the meaningful trends and data which can reveal true long-term opportunity.
Our experience lies in the structuring of property ownership, funding, directorship, management (including working alongside property agents, planning advisers, and design consultants), regulatory reporting (including ATED) and organising the purchase, the development, and/or the eventual sale or letting of the property. We administer a wide range of structures for holding property directly or indirectly. Whether acquiring property to hold as an investment, or for redevelopment, we have knowledge needed to administer structures and complex transactions.
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