The Investec Wealth Forum - European commercial property market rallying

European commercial property market rallying

11 December 2017

While Europe is bouncing back, the UK’s commercial property market could lose out over Brexit uncertainty, says Chris Hills, Chief Investment Officer, Investec Wealth & Investment UK.

Chris Hills

Chief Investment Officer, Investec Wealth & Investment UK

The European commercial property market is recovering thanks to stimulus from the European Central Bank, but Brexit uncertainty could be a double edged sword for the UK real estate market, says Chris Hills, Chief Investment Officer, Investec Wealth & Investment UK.

“In Europe, we’ve seen equity prices strengthen, real estate prices rallying from the disappointment of last year, rental prices increasing and the threat of deflation (that would be quite negative for real estate values in Europe) is receding so that’s all quite positive,” says Hills, a member of Investec’s Global Investment Strategy Group.

The impact of Brexit on the UK commercial property market

With few concrete decisions coming out of Brexit negotiations, potentially for the next 12-18 months, and the transition period possibly stretching out until the UK general election in 2022, Hills believes the uncertainty may reduce UK growth forecasts and therefore negatively impact commercial property values.

“But if sterling were to weaken again, that makes the UK, particularly London commercial real estate, more attractive to international investors. So it’s a bit of a paradox – you win on one side, you lose a bit on the other side,” says Hills.

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Commercial property in the rest of Europe

In addition to Germany and France, whose commercial property markets are particularly strong, Hills cites Dublin as another hub to watch as Brexit drives London financial sector jobs out of the UK.

“We like Spain – economic recovery there has been solid. Much better than people might have feared two or three years ago, but there aren’t a plethora of quoted real estate players. For commercial real estate, you’re pretty much limited to Madrid and Barcelona and there are no more than a handful of property companies that offer you that access,” says Hills.

Brexit’s impact on the London commercial property

After the financial crisis, which killed the supply of commercial space, London led the charge with a “rapid bounce in capital values and a big increase in rent”, with the rest of the UK seeing no benefit at all.

“Now you’re beginning to see business confidence in the North of England improving following the fall in sterling that followed the Brexit vote. Tenant demand has been quite solid, tenant renewals of leases has been good and now the doubts are more about London and how they might lose from a messy Brexit.”

“One of the big issues for us as an investor is how sensitive the rental growth projections and thereby the capital values are to projections of economic growth. If we’ve got a lot of uncertainty about what the shape of economic growth might be in 2019/2020, we’re looking potentially at property angles that aren’t correlated to natural GDP,” concludes Hills.

 

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