Brexit: U.S. Investors and U.K. Real Estate | FTI Consulting

Brexit: Time for U.S. Investors to Exit U.K. Real Estate or Build a Portfolio?

Real Estate & Infrastructure | Real Estate Finance & Investment (Reprint)

August 8, 2016

London Skyline

The recent vote in the United Kingdom to leave the European Union has had some immediate effects there—but how will they affect U.S. investors across the pond?

So far, the Brexit impact is being sharply felt in the banking and property sectors. These are being played out in two pressing issues facing Britain right now. They are:

  1. The volatility of the pound Sterling’s valuation against the dollar. The Sterling dropped to a 30-year low within one day and at the time of this writing, was valued at only $1.29, a threshold it has not seen since 1985.
  2. Trading suspended on several UK property funds amid a post-Brexit rush by retail investors to exit the real estate asset class. The seven suspended funds are Columbia Threadneedle, Canada Life, Henderson, M&G, Standard Life Investments, Aviva Investors and Aberdeen Asset Management. This suspension (for an unspecified length of time) prevents investors from selling their investments, which in turn avoids large withdrawal demands the funds may not be able to honor in the short term. The trading suspension and the selling frenzy are significant for several reasons.

  • Citing lack of liquidity in the face of extraordinary circumstances (and sell offs), the suspended trading allows the funds to better manage cash flows, and conduct orderly asset sales in order to meet redemption obligations to investors. Banks have relaxed some restrictions in order to keep credit markets fluid and support the funds as they regroup, to avoid a market collapse.
  • So far, the suspension actions by these seven funds have frozen over half of the £25 billion in the Investment Association property sector (the IA is a trade association for the U.K. investment management industry). Openended property funds now own five percent of the U.K. commercial property market (up from two percent in 2007).
  • There is concern that other funds will follow suit, and that their forced selling of buildings could lead to a steep drop in commercial property prices, as occurred during the 2008 financial crisis in the U.K. Property prices had, till now, been steadily growing since then.
  • As people rebalance their books and divest their real estate holdings, there will be more inventory coming onto the market than has been available in the past six to nine months (given how tight the market became leading up to the referendum). This will soften prices as supply increases but by avoiding being forced sellers, the funds hope to control the level of discounts.

Right now London fund managers are moving substantial funds into other assets as nervous investors in Great Britain are trying to sell real estate holdings. Compounding this, the pound has lost value against the dollar rather quickly. Adding to the pressures, Continental (European) real estate is now becoming a more attractive target investment, and British REITs – another investment sector – continue to suffer from stock prices at significant discounts to net asset value, though this is hardly surprising with so many retail funds invested in REITs and an expected correction in U.K. real estate prices.

So what does the future hold for U.K. real estate assets and U.S. investors?

Posted with permission from Real Estate Finance & Investment. Copyright ©2016. All rights reserved.

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