By Christine Shepherd
Reports of frozen funds, uncertainty and falling prices have dominated the coverage regarding property investment since the Brexit vote in June 2016. However, despite the difficulties faced by many of the larger institutions and pension funds with real estate allocations, many smaller and private property companies have used the environment to their advantage.
Uncertainty creates window of opportunity
Smaller funds and private families have seen some benefits from the current post-Brexit situation, as the larger institutional funds have pulled back their investments and have been in a wait-and-see mode. Indeed, some of the biggest UK property funds remain shut, including those at Standard Life Investments, Aviva Investors and M&G Investments. In August, Aviva told investors it wouldn’t reopen its fund for at least another six months.
Little hard data that funds would find useful has been released, as the actual effects of Brexit will only be reflected in Q3, which will not be released until the end of October or November; subsequently, firms that rely on this public data to make informed investment decisions have either had to accept additional uncertainty or delay acquisitions. Institutions that rely more heavily on hard data to back up their investment decisions have been less active, providing more opportunities for other players.
In contrast to the larger illiquid institutions, funds in a positive cash position have been able to benefit from this investment environment with less competition from major players. Their ability to move quickly and quietly is central to this, along with their reputation for taking deals over the finish line. The few larger funds that have been pushed into selling positions to pay for redemptions have quietly marketed their properties, providing off-market opportunities for others. After all, no one wants to be seen listing a property and not being able to sell it.
Weak sterling boosts international investment
Sterling’s fall and weak position is on the mind of all investors, but there are some who are smiling. More North American and overseas investors are taking advantage of this opportunity by converting their money with hopes of investing in UK and European property. Regardless of Brexit, London will remain a top destination for foreign capital as it is one of the most transparent markets in the world.
In addition to the low pound, diversification, low cost of debt and a relatively stable market are attractive qualities of European markets. Funds based in London, North America, the Middle East and China have been raising funds to invest in European property markets, but are proceeding with caution.
Focus on fundamentals
For those looking to mitigate risk when investing in European real estate, the variety of factors to consider has never been greater. With additional uncertainty, firms need to focus on their fundamental knowledge of the cities they invest in, instead of chasing yield. Property investors must look at the key drivers in the locations they invest in; using Germany as an example, many investors are looking at cities that are considered ‘brain hubs’, so-called as companies are keen to sit alongside a young, educated and driven work force. This will lead to an increased job creation, and in turn create a demand for office space in the city. Companies who can identify such trends in the short-term will prove to be the long-term winners.
Sectors such as high street retail, prime office, logistics centres for e-commerce business and hotels in tourist destinations will continue to attract attention in individual markets. Whether it be offices in Italy or logistics in Spain, opportunities are available across the continent. At the same time, events such as Brexit are putting investment firms on their toes to find the next European sweet spot for investment – this has already been reflected in heightened interest in cities such as Paris and Dublin, which are tipped to record an increase in office demand as some companies consider relocating from London.
Opportunism is key
As the complexities of the European property market continue to develop, so does the range of opportunities available to investors. In such a climate, the ability to act quickly and efficiently is key. Private families and smaller firms have the luxury of being able to act on their gut feeling – something that might pay dividends in the months and years to come.
Christine Shepherd is an investment & fund analyst at Avignon Capital
