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Euromoney: Real Estate Survey 2016 Brexit - Mortal Blow for Bricks and Mortar?

According to Euromoney: UK commercial real estate’s post-Brexit shock has proved short-lived, and high-profile gating of investors in a number of UK real estate funds did not precipitate a flood of copy-cat behaviour. But the long-term outlook for investors and lenders in UK real estate remains extremely uncertain.

"There’s not the distressed selling that some feared might take place," says Hemant Kotak, a managing director at Green Street Advisors in London, who had initially warned that commercial property prices could fall as much as 20%.  "It’s a much healthier place that we’re in today than in the immediate aftermath of the referendum. In terms of the transactions we’ve seen, there have been modest discounts, but they’re special cases. So it feels pretty good. Maybe there’s more downside risk from here, but there is a higher chance that we won’t get to that 20% anytime  soon."

"There will be an impact on demand but the impact will be more measured," says Kotak at Green Street. "That allows the supply pipeline to turn off to some extent, but vacancy levels are low, so it’s a healthier starting point than in past cycles where we’ve seen really big corrections in rents."  Kotak adds that City vacancies could rise by as much as 10%, whereas London’s West End is more insulated because it has fewer banking and finance tenants and less new supply in the pipeline.

"It is a flawed structure," says Kotak. "These funds will certainly be looked at in finer detail and some of the provisions will need to get amended. It’s the second time it’s happened now – we had this back in the global financial crisis, so we should have learned the lessons then. The requirement for funds with retail investors to offer liquidity needs to be looked at, because you just cannot offer it with this asset class."  One reason for optimism is that retail funds make up only a small part of the market, about 6%, according to Neale, and therefore that panic is unlikely to spread to other parts of the commercial property sector. The low-rate environment is also likely to support real estate demand because yield-starved investors continue to seek higher-yielding assets.


To view the full article on Euromoney, click here.