Brexit looms over UK offices
Investors are ditching UK property as Brexit uncertainty, rising interest rates and inflation erode house prices and office values in a market hurtling towards a potentially messy exit from the EU.
Shorting real estate investment trust shares is gaining in popularity, as the UK government publishes plans to cope with any disruption if the UK and the EU can’t agree on the terms of its departure.
The list of the UK’s top 50 most shorted stocks is peppered with real estate names. They range from real estate investment trust Intu and NewRiver to housebuilders Crest Nicholson and McCarthy & Stone to the number one short, Travis Perkins, which sells building materials, Markit data shows. Shorting (net of borrowing costs) would have been lucrative.
British real estate investment trusts have underperformed their European counterparts by more than 20% since the 2016 referendum.
Office real estate is also under pressures from Brexit. London offices now demand a hefty premium over those in Dublin, Paris, Frankfurt or Amsterdam, but a drop in London’s relevance as a financial centre is weighing on its market valuation.
Several banks are already moving part of their operations from London to Dublin, Frankfurt, Paris, and Amsterdam after Brexit.
“People are clearly thinking that with Brexit there will be some movement to Dublin, and therefore why should London command a circa 50% premium on a per square foot basis,” said Henry Dixon, portfolio manager of the Undervalued Assets fund at Man GLG.
Fewer EU nationals working in the country will also lower demand for residential and office space. The second quarter saw the biggest drop in EU nationals working in the UK since records began.
Net EU migration to the UK has fallen to its lowest since 2012. Market pricing has already, to an extent, factored these pressures in. “If London offices are being valued at £1,500 [€1,670] per square foot but [real estate investment trusts are trading] at a 30% discount to net asset value,” Dixon said.
“In many ways, the market seems to be already valuing London as being akin to Dublin,” he said. Land Securities, which derives nearly half its capital value from offices in London’s City and West End, trades at a 30% discount to book value.
