While the Brexit shock and political instability have left the United Kingdom’s economy subdued compared to other major countries, the commercial property market has been setting new records. The demands on the nation’s top real estate advisors have increased dramatically.
The result has been a boon for Gerald Eve, Lee & Associates’ European strategic ally, which was recently honored as ‘National Advisor of the Year’ at the prestigious EG Awards, presented by weekly UK commercial property magazine Estates Gazette.
“Reflecting on the UK market, certainly after talking to the CEOs and senior partners of the top ten firms here, we’ve all had quite a good year. Better than we anticipated,” said Simon Prichard, Senior Partner of Gerald Eve, which has 470 brokers and staff in nine offices across the U.K. and alliance partners in more than 20 European countries.
Speaking with Link following his re-election to a three-year term, Prichard expressed his views on the broad challenges and opportunities in the UK commercial property market following the Brexit vote and subsequent devaluation of the British pound. He also touched on the economic climate, the effects of Chinese capital in commercial property and the outlook for Europe and U.S. markets.
On Brexit, he said: “The real estate sector was very much on the ‘remain’ side of the argument, but we live in a democracy and you can’t always get your way. We’ve dealt with the initial shock, and the general feeling now is one of ‘getting on with it’.” He also acknowledged the surge of foreign investment into the UK commercial property, particularly from China, that followed the vote to leave the EU.
“The market feels a bit toppy. Not just real estate, but across a lot of asset classes. We’re seeing super-hot yields and Chinese money chasing trophy assets across the country, particularly in London. Look further afield and nearly every city worldwide looks expensive. Many locations feel toppy,” he said. Prichard added that incremental rate increases from European central banks are likely to start in mid 2018, and will reach 3.5% to 4% in due course.
“When the amount of quantitative easing that Europe has seen takes place, there’s a certain inevitability that you’ll see inflation. We’ve certainly seen inflation increase across Western Europe, and as a consequence I think we’ll see interest rates start to rise in the first half of this year. They’ll plateau around 4% in time, but generally the outlook is fairly benign,” he said.
“What has changed in the last six months is with second tier assets. If you have an investment with a bit of a wart, or uncertainty around it, the yield is pushing out and the price you’re asking is not achievable. People are more discerning. They’re taking longer to look at things.”
Prichard also said he believes that Beijing will increase currency controls, curtailing activity everywhere.
“There isn’t the competitive tension and pressure on assets that was present over the last three or four years. But something that is Class A will be fine and will demand a global premium,” he said.
Asked how the U.S. economy is positioned in a world in which the IMF forecasts contraction in 2018 in the economies of only a handful of nearly 200 developed countries, Prichard said solid economic fundamentals make the U.S. a leading competitor for big blocks of foreign capital, he said, adding, “Providing you don’t do anything stupid.”
“We’re probably more fixated about Donald Trump than you are. We’re always interested to find out what he said or what he’s done or what he’s about. The US has value in the world and its actions can have a disproportionate effect elsewhere. There’s always that concern that if the US sneezes, the rest of the world catches a cold,” he said.
Of course, the UK has its own issues. The nation faces a possible £50 billion taxpayer cost to split from the European Union and continued political aftershocks that look to topple Prime Minister Theresa May and the Conservative Party from power.
“The UK is in a bit of a fog, and Europe is benefiting at the moment from international investment in a way it perhaps hasn’t done in four or five years. This improvement has largely been on the back of the perception that the economies are strengthening, also bearing in mind that the European economies fell further than the U.S. and UK and are coming from a lower base in the last ten years, he said.
“If you want to buy in Madrid or Paris, you’re still down to 3.5 percent yields. These are super-hot yields that I haven’t seen in 30 years of real estate. Every major city around the globe is expensive.”
But it’s the nation’s politics and an imminent change in policies that has the business community on high alert. “What UK business is really focused on is the very real possibility that the Labour Party has gone from a political joke to forming the next government, and its left-wing leader Jeremy Corbyn becoming Prime Minister.
“Society is polarized, and Labour is capitalizing on this friction,” he said. “There’s talk of a wealth tax and transaction tax,” he said, referring to a proposed 0.5% levy on financial trades, being termed a ‘Robin Hood tax.’ Advocates claim it would raise £26 billion, while opponents say it will shrink the economy and erode the City of London’s influence as a financial centre.
“It’s interesting. For the first time, we’ve had two clients ask us to do viability studies regarding relocating their business to Dublin, Luxembourg, Amsterdam or potentially the United States, and had discussions about adding a clause to leases and renewals, enabling the tenant to break an agreement in the event of a change in government or new taxes. Let’s call it a ‘Corbyn Clause,’” he said. “People are asking for it. It’s one of the things I think we’re going to see creeping into leases.”
Prichard said Gerald Eve advises the Bank of England on real estate and is recognized among the nation’s leading full-service real estate advisors. “I think we have quite a robust business model. We’re like Lee & Associates, a partnership structure, enabling us to, dare I say, align and long-term think,” he said.
“We’re enjoying pretty significant popularity at the moment. We’re in vogue. We’re working on mandates for Goldman Sachs, we’re working for Credit Suisse and JP Morgan, which ordinarily would be the domain of CBRE, JLL and Cushman. We’ve certainly been able to upscale our client booking in the last few years.”