CoStar Column: CRE in London increasingly ripe for the picking

By Manish Chande - Friday, May 11, 2018 8:49

UK real estate has long been an attractive investment for overseas investors. Yet Brexit uncertainty has threatened to change the opinion of most, in the short-term at least, and that makes London look increasingly ripe for the picking, writes Manish Chande, Senior Partner at Clearbell.

With the UK’s departure from the EU on the horizon, and with negotiations still providing little clarity, many investors – excluding what I would call the ‘trophy hunters’ – are choosing to keep their powder dry.

In practice, this often takes the form of institutions reallocating the UK portion of their portfolio to continental Europe. But is this the best approach to the current environment? For those who know the UK market well, the opportunities are only just starting to look more interesting, particularly in London which has been overpriced for so long.

Overall, the doomsayers have been proven wrong in recent months. The swathe of tenants, notably financial services tenants, expected to up and leave the UK is yet to materialise. We are also seeing tenant demand being held up by creative and tech businesses. For example, the UK fintech sector now employs over 60,000 people.

This strong tenant demand is being complemented by a softening of prices. And we’re expecting the lack of clarity around Brexit from Theresa May to drag in the coming months. This sustained uncertainty will start to take its toll on London’s commercial property prices.

We expect the kinds of assets that fall outside of the scope of an overseas billionaire, for example, to be affected. These will include most of the commercial assets within central London and on the outskirts. They will generally have good long-term prospects but in the current environment the perceived risk does not look worth the potential investment for many. London trophy assets won’t be affected in the same way, as the recent sales of the “Walkie Talkie” and “Cheesegrater” suggest.

This increasing lack of appetite for non-prime assets in London and move to de-risk portfolios to ensure they’re not too heavily UK-focused are signs the ‘risk-off’ environment in London is hotting up.

We’re seeing growing evidence of deals being withdrawn from the market or subject to repricing if there are any perceived imperfections in a building. This is encouraging individuals to reduce sale prices for non-prime London assets, as buyer sentiment weakens.

This in turn is impacting on tenant demand. Whilst this remains robust in overall terms, tenants are becoming a little more tentative and are becoming quicker to point out small imperfections in potential offices as an excuse to delay making a decision on tenancy.

A prominent theme is employers’ increased focus on employee wellbeing. Newer office blocks are often designed with flexible working spaces and large breakout areas at the heart of the space. But more creativity is often needed to transform assets into a space fit for the modern worker. This can be a barrier for potential tenants.

Non-prime London assets disproportionately fall prey to this, but these issues can be ironed out with quick and focused asset management.

We expect cooling buyer sentiment towards non-prime assets to drive down prices in London in the coming months.

This presents a significant buying opportunity. But it’s not simply a case of buy and hold. These assets will need some TLC.

For those who wish to capitalise on falling prices in London, it is crucial to have the know-how and appetite for asset management.

Manish Chande, Senior Partner at Clearbell

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