#Real Estate — 16.10.2017

Where Do We Stand With Brexit?

Pol R. Tansens

All our answers in our Real Estate report: « Is Real Estate Portfolio Diversification Starting To Pay Off? »

An analysis of annual total returns (before debt financing) over the 12-month period to 30 June 2017 shows that UK commercial property remained relatively resilient (1). Capital values – for a mix of offices, retail and industrial assets across the UK – rose by 3.7% in the year to June 2017, bringing total annual returns (supplemented with net rents) well above 5% for the 12-month period. Nevertheless, overall average annual returns were distorted by the exceptional performance of the industrial sector. Strikingly, industrial assets performed the best, with ungeared total returns close to 16% in the year to June 2017. Offices plateaued during this period, reporting modest capital losses in the couple of months after the Brexit vote before generating a positive capital appreciation return in 1H17.

In any case, we are a long way off the apocalyptic forecasts of capital appreciation returns made just after the Brexit vote of June last year.

The question on everyone’s lips is what will happen on the London office market in the years ahead? BNP Paribas Real Estate predicts modest annual total returns overall for the City and for the West End in 2017-2019, despite a capital loss of more than 4% in 2018.

Will the UK and continental Europe eventually push through a hard Brexit policy? A very tough question.

BNP Paribas Wealth Management economists predict that the UK economy will remain stable this year compared with 2016. Their baseline scenario is constant growth of 1.8% this year, declining to 1.1% in 2018 (2).

Meanwhile, banks and insurance companies based in the UK have started announcing plans to relocate jobs to Continental Europe. But it is very difficult to assess how many jobs are at stake. To illustrate this, Citigroup Inc. has chosen Frankfurt to be the ‘New European Trading Hub’, moving about 150 to 250 jobs to the German city. However, the UK will remain Citi’s headquarters for Europe, the Middle East and Africa (3). Frankfurt could be one of the principal beneficiaries of the Brexit vote, with Standard Chartered Plc, Nomura Holdings Inc., Sumitomo Mitsui Financial Group Inc. and Daiwa Securities Group Inc. also announcing it as their EU hub in recent weeks. Deutsche Bank AG is also said to be transferring large chunks of its London-based trading and investment-banking assets to its hometown of Frankfurt (4). With many firms not having made any public announcements so far, numbers remain imprecise at this stage.

However, High Net Worth Individuals (HNWIs) are still eager to invest in the UK and particular in London.

Most of the questions from our Asian key clients are related to the UK property markets – especially the high-end residential markets – and the prospects in the wake of the depreciating pound and lower nominal prices.

Watch our Head of Real Estate Investment Strategy explain more about Brexit.

(1) Source: CBRE Research, 2Q17

(2) Source: BNP Paribas Wealth Management, September 2017

(3) Source: Bloomberg, 18 July 2017

(4) Source: Bloomberg, 5 July 2017