Nigel Almond, Head of EMEA Capital Markets Research, analyses the effect of Brexit on investment deals.
Since the vote to leave the EU was announced on 24 June, we have been tracking the progress of approximately £14bn worth of assets which were on the market prior to the vote. By tracking deals from before the nation went to the ballot box in June we have gained a unique picture of how the market has subsequently reacted to the vote for Brexit.
The Brexit Deal Tracker shows that approximately £8bn worth of these assets have now sold and paints a clear picture of the impact of the Brexit vote on deals that were ‘live’ on 23 June. With 54% sold, a further 15% under offer, and 25% withdrawn that leaves just 6% of deals (by value) still in the market. More than 200 office, retail and industrial assets have transacted, accounting for 45% of total investment activity in the second half of 2016.
Deals have taken longer to complete and a greater proportion have been withdrawn but, on the flip side, values have held up remarkably well reflecting the UK’s strong fundamentals. That said, we do not yet know the full implications of the UK’s decision to leave and how that will manifest itself in occupational markets.
In the immediate aftermath of the result, progress on larger lots (£100m+) lagged well behind smaller (sub £20m lots) by three months. While greater due diligence and delay might be expected even under normal trading conditions, it is clear that investors were taking more time before signing off on significant investments. By November, progress for larger lots had caught up and has since matched sub-£20m deals. Deals in the £20m to £99m range continue to lag.
Typically you might expect transactions to take three months to go under offer – since the Brexit vote it has been taking up to five or even six months for deals to progress this far. The lower proportion of completed deals in the mid-range can be partly explained by a number of shopping centres which are currently under offer and we expect those to be sold in the near future.
Long term income is in demand; we found that close to two thirds of assets with a known weighted average unexpired lease term (WAULT) greater than 10 years have now completed, compared to fewer than half of assets under a decade. In a market characterised by uncertainty it is clear that investors are focused on secure long term income.
Despite the delays, commercial property values have held up well. The average discount between offer price and sale price is just 3% – a stark contrast to the plunge in values predicted by many commentators following the EU Referendum result. Assets located outside London have incurred an average 3.9% discount compared to a 2.4% fall in London. Retail assets (in particular high street shops) have proved easiest to sell but have attracted a larger discount and shown a higher degree of variability in pricing. Offices have seen the second largest discount, with those outside London attracting a larger discount and higher degree of variation compared to London. Industrial assets – such as the warehousing which underpins modern supply chains – have, on average, sold above offer price by 1.3%.
Overseas investors represent nearly three quarters of activity in London, whereas in the rest of the UK, domestic players remain the dominant buying force (nearly 60%). This reflects the wider market – including assets put up for sale after the result of the referendum was known – with London seeing an influx of Asian capital, mostly from Hong Kong and mainland China.