Below is a summary of an event run by Bisnow (London) in late February that grouped a number of property industry figures to discuss current trends in strategic funding and other related topics. Although relatively London-centric in terms of content, the discussions also touched on the broader market´s reaction to the referendum result, the long term effects of a seemingly entrenched low interest rate environment, foreign investor´s appetite to fund deals post-Brexit, ongoing risks and the emergence of the build to rent sector:
- Paul Clark, Chief Investment Officer at The Crown Estate started the morning´s discussion elaborating on the business´s 3% return in 2016 as a reflection of post-referendum mild volatility. As the UK´s largest property manager with urban stock-holdings valued at £1 billion (and an interesting barometer of market performance as a whole), Clark reported that the slowdown was not as acute as expected – but envisaged that leasing activity will be “attritional” during the course of 2017 as yield and values plateau in line with the overhang of predominantly Brexit-led uncertainty;
- In the 10th anniversary of the initial impacts of the global financial crisis, it was argued that the firepower plugged into British economy (predominantly in the form of lower interest rates, bank bailouts and quantitative easing) had effectively extended the market peak. Keith Breslauer, Managing Partner at Patron Capital Partners pointed out that UK property owners experienced a relatively stabilised market post-2008, contrary to what occurred in the US;
- Navigating through a number of structural issues such as the higher rates of inflation, largely fuelled by downward pressures on sterling, may pose challenges and other unpredictable “flash points” in the coming years. It was also commented that the Bank of England could find raising interest rates problematic without affecting a significant proportion of homeowners. An embedded balance of payments issue, slow infrastructure growth, productivity were other broader concerns expressed during the course of the discussions;
- However, with debt markets noticeably calming since June 24th and low loan pricing, predicting what the future holds is increasingly difficult. The ebbs and flows of the media´s interpretation of property market dynamics often means very little. Property development risks, Brexit-led or otherwise, are always going to going to be present, regardless of the position in the cycle. The industry can only work on the basis of “what it knows”;
- Retorting on the question of an over-heated property market in the capital, it was highlighted how the higher density of cranes in the West End does not necessarily signal a bubble as many of the units are already pre-let. However, with the Carter Jonas “London Office Market Update” predicting a decline in London office rents by 8-12% over the next 18-24 months (alongside longer rent-free periods, shorter leases and more frequent break options), investors were advised to price in current and future risks into their appraisals;
- The depth, strength and “safe haven” status of the UK property industry is expected to continue to attract foreign investment and the cheap exchange rate will spur more opportunistic acquisitions. Particularly in prime central London, sellers have been reducing their asking prices to reflect the lack of certainty resulting from the referendum as well the increase of higher level stamp duty. In addition to “trophy” investment destinations such as Kensington, Chelsea and the Nine Elms district, “secondary” cities such as Manchester and Birmingham are also expected to see continued interest. Foreign investors were deemed as having an important role to play in funding scaled projects and are generally perceived to be less risk averse compared to domestic investors. One cited example was the heavy Chinese investment in the East Village area of London where construction is moving forward despite there being no pre-lets and pre-sales. With UK investors generally not willing to step in and co-fund such projects, Brexit does not seem to be a deterring factor. Nonetheless, it was noted that global economic turbulence and anti-speculative controls may effect overseas investment capacity in the UK.
- Contrary to the wider development industry consensus, Jonathan Goldstein CEO at Cain Hoy Enterprise highlighted the importance of meeting London´s housing shortage and how the 35% affordable requirement should be actively encouraged irrespective of the lower Gross Development Value (GDV) implications. Whilst not underestimating the challenge for developers, it was argued that the issue of viability may well be overcome by the growth of modular housing and an underlying goal of searching for pockets of London where sites can be purchased at sensible / conservative levels with the aim of creating place and therefore value;
- Related to this last issue, it was agreed that the growth of build to rent will have an important role to play in boosting a wider tenure mix. With build out and absorption rates supposedly superior to build to sell and longer-term income streams, the model is said to be less prone to market volatility. The sector, however, is still in its infancy and concerns were voiced with regards to genuinely creating valuation benefit over time, a “farsical” planning system stymieing supply and whether such schemes can genuinely become part of longer-term placemaking strategies.