As MIPIM 2017 fast approaches, with 23,000 delegates expected to converge on Cannes next week for four days of exhibitions, insight, networking and learning, it’s worth reflecting on what has been a remarkable 12 months in commercial real estate.
As everyone left MIPIM in 2016, the general mood across the industry was one of concern. For those working in Europe, and especially the UK, the referendum to decide whether the UK would stay in the EU was casting a long shadow.
With uncertainty over which way the vote would go, the start of 2016 had already seen a slow-down of deployment of capital into the UK, with institutional investors holding their ground. It’s a situation that was made even more stagnant when then Chancellor George Osborne presented his budget on 16 March.
Out of his red briefcase he pulled a number of announcements that directly targeted commercial property, including:
- The increase on stamp duty land tax on commercial property from 4% to 5%
- Changes to property development activities undertaken by non-UK companies
- Taxation of property development and trading to be based on the situs of the asset (aiming to ‘level the playing field’ between offshore companies and UK companies) meaning offshore companies were to be subject to corporation tax at 19% on development/trading profits
- Significant increases in SDLT (tiered up to 12% for second homes and residential investment properties)
On the back of these changes, but mainly as a result of the impending EU referendum, we saw a prolonged period of reflection after MIPIM 2016 and in the run up to the vote on 23 June, as investment players took a ‘wait and see’ stance. Everyone – from lawyers and tax practitioners to ancillary players – was concerned about the lack of transactional activity. And any big deals that did go through contained what some commercial law firms referred to as ‘Brexit clauses’ – get out of jail free cards in the event of a ‘leave’ vote.
It’s worth noting, however, that during this time, we did notice that some of our clients – arguably those with a more entrepreneurial bent – saw opportunity in this fallow period and used it to snap up some deals that would otherwise have been out of their reach and would normally have been swallowed up by institutions. Still, they were very much in the minority.
And then, to the astonishment of many, Brexit happened. And for the weeks that followed, the headlines focused on transactions being pulled, hiring freezes, uncertainty and the depressed level of deal volumes in the first half of the year.
Curiously, however, this seemed to contradict what we were hearing on the ground. The day after the vote, I was in London meeting a Chinese investor who told me the China view on Brexit was that the UK would become truly global and that he saw huge potential there.
And this was not a solitary view. We saw Middle and Far Eastern clients activate and look to deploy significant levels of capital into the UK CRE market. Investors with capital sourced from these parts of the world took one look at the rapid drop off in sterling following the vote and immediately saw significant savings of some 15 to 20 per cent.
We also saw a shift towards alternative asset classes, with hotels and purpose-built student accommodation (PBSA) appearing to be more popular than traditional office or retail space. This is an observation that was recently backed up in the Knight Frank Wealth Report 2017, which noted that private investors were particularly interested in ‘buildings with beds’, with the report citing that clients were increasingly asking for advice on the development, purchase and management of assets such as hotels, private rented sector residential investments, student housing, senior living and healthcare facilities.
This manifested itself in a number of our clients undertaking some of the biggest real estate asset-backed financing and acquisition deals ever in Q3 and Q4 of 2016. For example, a London-based operator and developer of PBSA secured a £350 million senior facility from a syndicate of institutional investors against a 2,520-bed PBSA portfolio.
In another PBSA deal in Q3, we supported what was then the largest acquisition post-Brexit, where a global developer acquired a portfolio of 7,150 PBSA beds. And during Q4, a UK-based developer and operator of motor service areas issued a significant portfolio backed bond issuance of £190 million with a prominent insurer.
And the election of Donald Trump provided what may well be good news for the UK market. Trump’s protectionist ‘America First’ policy will likely see Chinese investors move to deploy even further capital into the UK as a result of likely increased scrutiny from the Committee on Foreign Investment in the United States (CFIUS), given the complicated relationship between the two countries. Last year Chinese investors pumped some USD$16.9bn (across 37 deals) into US real estate – an avenue that may be largely closed off to them in 2017. This presents great opportunity for the UK.
As such, while the internet unanimously decried 2016 as a disastrous year – for our clients in the real estate sector this was certainly not the case. Some of their biggest deals were executed in 2016.
Despite some understandably negative aspects, we tend to go along with the view in Knight Frank’s Wealth Report 2017 that: “although many people will have been relieved to see the back of 2016, global commercial real estate remained a beacon of light throughout the year for both institutional and private investors. Transaction volumes were robust and returns favourable when measured against other asset classes.”
What’s more, the report also indicated that the UK was likely to remain a prime target for private investors during 2017 – with The Wealth Report Attitudes Survey showing that it is the number one country that private property investors are most likely to invest in.
All of this leaves us quite excited about the prospects for commercial real estate, and with MIPIM 2017 just a few days away, we will be boarding our flights to Nice airport with a sense of excitement about the year to come. Yes, the worst isn’t behind us in terms of the uncertainty that remains around Brexit, but the continued weakness of the pound coupled with even more political uncertainty elsewhere continues to make the UK, particularly London, a seriously attractive proposition.
We see the appetite for alternative assets such as PBSA, hotels and healthcare continuing, and offering the best prospects for 2017. We’re also seeing a number of our clients turning to the private rented sector (PRS) as a real alternative to deliver returns, particularly in light of government’s housing targets and the recent inclusion of PRS units in helping achieve those targets.
A trend toward European real estate is also growing – Ireland, Germany and other key European locations are becoming serious targets for many.
While the coming year won’t be without its issues, we can’t help but feel that there will be considerably more optimism about 2017 generally.
Paula Thompson is a client services director for First Names Group in Jersey, and part of our international real estate team. Paula specialises in structuring for the acquisition, development and holding of commercial real estate across a wide variety of property classes.
This article has been issued by First Names Management Limited on behalf of certain companies that form part of the First Names Group. The article has been prepared for general circulation to clients and intermediaries, and does not have regard to the particular circumstances or needs of any specific person who may read it. Nothing in this article constitutes legal, accounting or tax advice or investment advice.
The information contained in this article has been compiled by First Names Management Limited and/or its affiliates from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgements as of the date of publication, and are provided in good faith but without legal responsibility.