Months of political turmoil have damaged the UK’s reputation globally and deterred investment from international property investors, say real estate leaders.
Investment deals are slowing and values falling, and senior figures now worry that the UK’s place on the world stage has been set back by the various crises that have engulfed its government.
“I spent the past two weeks travelling, and I would say it’s almost a bit embarrassing right now to say I’m from England,” said James Raynor, chief executive of Grosvenor Property UK. “The general mood overseas is one of complete bemusement as to why and how we do things. That, for me, is very worrying in terms of UK plc branding.”
Remco Simon, chief strategy and investment officer at Landsec, said: “A structural concern which we think desperately needs addressing is that we must get a sense of political stability and confidence back in this country. That is not just for real estate, but across the wider capital markets. If you look at the growth of, say, the overall UK stock market relative to other countries over the past 10-15 years, it is pretty clear that there is a significant concern around investing in UK plc, and we see the same in our sector.”
Raynor, Simon and others were speaking at a roundtable to launch the British Property Federation’s latest Property Leader Sentiment Survey, carried out between mid-December and mid-January and polling more than 100 owners, developers, funders, agents and advisers.
The results were downbeat. Half of respondents said they were “not very confident” about the UK’s economic prospects over the next 12 months, while a further 21% said they were “not confident at all”. None described themselves as “very confident”. Asked for their expectations for the performance of UK real estate over 2023, 60% were unconfident and none were “very confident”. Economic uncertainty was flagged as the biggest risk to respondents’ companies in the near and medium term.
Over a five-year horizon, respondents were more optimistic, with 67% and 56% “fairly confident” about the economy and real estate respectively. Life sciences, student accommodation and build-to-rent were pegged as the most promising sectors for returns, with regional offices, for-sale residential and leisure real estate at the other end of the spectrum.
Boardroom bosses are adjusting to a new era in asset pricing. David Marks, chief executive of Brockton Everlast, said valuation falls had been “short, sharp and quick” during the final months of 2022, but added: “I don’t think it’s as bad as ’08.”
He said: “It would be wrong to make a direct comparison to the GFC in the sense that the capital markets across the entire world were completely frozen overnight back in ’08 – repo paper was not even functioning and every bank on the planet was completely bust. It was Armageddon. And from a valuation perspective and peak-to-trough values in the UK, I’m pretty sure they fell 44% in a 24-month bloodbath.”
Nonetheless, Marks added: “The valuers caught up pretty quickly in Q4 [2022]. And I think they had, with the lack of investment market turnover, no alternative but to mark down pretty severely in the wake of some pretty aggressive rate hiking.”
Roundtable participants agreed that a more diverse lender base than in the global financial crisis should provide more stability to real estate finance, as should lower loan-to-value ratios. Recalling her past work at RBS handling £38bn of distressed real estate debt, Grainger chief executive Helen Gordon said: “Some of that lending was up to 90% loan-to-value. You can see now, with lots of people at much lower levels of leverage, there’s not going to be anywhere near the same level of distress.”
Landsec’s Simon described the investment market as functioning but selective. He pointed to last week’s sale of One New Street Square, EC4, to Hong Kong’s Chinachem Group for £349.5m. At just 3.6% less than its September valuation, Simon said the pricing discount was “less than what the market stats would suggest that values have moved”, adding: “There is interest, but it is a relatively short list of interested parties in our experience.”
He said: “We’ve seen in this specific case that most interest was from the Far East. That has changed a bit over the past six months. I think before the mini-Budget there was some interest from institutional parties out of Europe, but that went away when the mini-Budget came and hasn’t come back since.”
In years gone by, Simon said, UK real estate would be seen as a “safe haven” in which investors could escape crisis elsewhere in the world. “That notion is not completely gone, but it certainly needs a fair bit of time to be repaired.”