Studies & Reports


How the United Kingdom’s exit from the European Union will affect the British shopping center industry.

June 23, 2016 will certainly go down in history. On that day, 46.5 million Britons were asked to vote on whether the United Kingdom should remain in the European Union. As we now know, the majority of the population (51.9%) was opposed. Since then, a sense of urgency has gripped British and European politics.

The insecurity and uncertainty about the political and economic future of the European Union is being felt not only in the prime ministerial and presidential offices of the Member States, but has also led to a sense of helplessness in the European markets.

The real estate market, especially in the UK, has reacted with particular sensitivity to Britons’ “no” to Europe. Just a few weeks after the vote, it has become clear that British real estate prices are on the descent. For example, house prices in central London fell further in July than they had in years. They amounted to a substantial annualized decline of 1.5%. Experts expect even greater falls for commercial real estate.

Property prices slip

The reaction of British real estate funds to the vote recently showed how things could actually go. Four British fund providers recently downgraded their holdings vigorously.

Legal & General Investment Management, the insurer Legal & General’s investment company, with investments worth £2.3 billion (€2.7 billion), recently lowered the value of its holdings by a further 10% after an initial reduction of 5%. CCLA lowered its value by 4.5% and Kames, a subsidiary of the Dutch insurer Aegon, by 5%. The F&C fund, part of the Bank of Montreal, saw its value fall by 5%.

The intention of these devaluations is obvious. The redemption of fund shares should be significantly less attractive for investors after the devaluation. Shortly after the Brexit vote, investors already rushed to withdraw money from the funds. If liquidity shortages threaten open-end funds, they can even temporarily refuse share redemptions in order to prevent distressed object sales. Already in August, seven British real estate funds with a volume of £18 billion paused trading.

The worries persist. Experts expect that office space and shopping centers, in particular, could be heavily affected in the future due to their cyclicality. Although the Bank of England recently lowered its key interest rate to support lending and encourage consumption, market uncertainty remains. Many economists continue to expect that the island’s economy could slip into recession in the next few years.

Investments could fall dramatically

British real estate experts express little optimism. Investment volumes in the UK could drop by up to 25% as a result of the Brexit vote and continued market uncertainty.

This is the conclusion the experts in the EMEA Capital Markets team at Cushman & Wakefield come to in their recent report “Brexit and the European Property Investment Market.” “Some investors are still hesitant and are monitoring how the market develops in the UK,” says David Hutchings, author of the report and head of the EMEA Investment Strategy team at Cushman & Wakefield. He continues: “At the same time, most investors have very high liquidity and are therefore subject to heavy pressure to invest.”

Brian Tucker, head of the team Shopping Center Investments in Germany, says there is one development that is already making its impact felt: “Foreign open-end real estate funds, which previously preferred to place their money in the UK market, are now under heavy pressure to look for sustainable investment options in other developed markets.”

For example, Norway’s sovereign wealth fund, the world’s largest, has corrected the value of its properties in the UK downward by 5%. The meaning for the financing and implementation of new projects in the UK is obvious.

“Now is just not the time for large, new investments with us, especially since many are waiting to see if there could be a chain reaction in Northern Europe. This is even though I had looked forward to a really good year for new lending with us up until the vote. Now I advise people to wait for the time being,” the head of real estate of a major international bank recently admitted quietly.

The shopping center specialist Capital & Regional, which currently operates seven shopping centers in the UK, sees things somewhat more positively. According to the company, the Brexit vote has had no immediate effect on the conclusion of new leases. They are currently also not feeling any pricing pressure on new leases.

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