Savills Investment Management, a real estate fund house, has seen very little money leave its UK property strategies since Britain’s June 23 vote to leave the EU, said Kiran Patel, the firm's chief investment officer.
Between the referendum and August 1, the London-based firm's open-ended funds have seen net redemptions totalling 0.2% of their assets under management, he noted.
That’s in contrast to the billions being yanked from strategies run by asset managers such as Aberdeen, Aviva, Henderson, M&G, Standard Life and Threadneedle, over fears that property prices will fall.
Patel puts this down to the fact that most of Savills IM’s products comprise almost entirely institutional capital. “The funds seeing redemptions are those with a lot of retail customers,” he noted. “But institutions don’t get caught up by the public rhetoric.”
Morever, he added, Asian investors coming to Europe for real estate tend to want to start in the UK – and that’s not changing. “London is the draw,” he said, and the drop in sterling will clearly be seen as a positive.
In fact, other cities are attracting interest now as well, with Manchester seeing flows from investors in China and Saudi Arabia, among others, as reported.
Ultimately, strategic investment fundamentals for UK property have not changed, said Patel. “Are there big risks in terms of real estate lending? No. Are we seeing a huge amount of new supply? No. Is there a big drop-off in terms of property usage? No.”
The cost of financing may have risen a little when it comes to riskier assets, he added, but banks have cut their lending rate on core property.
There will be a flight to safety, said Patel. "Everyone will want to lend on less risky assets, hence greater competition for lending will drive down costs. The number of lenders will fall for riskier projects, leading to less competition, so there will be scope for banks to push up borrowing margins."
While it is too early to come to firm conclusions, noted Patel, anecdotal evidence suggests property investment volumes have fallen a little as a result of market uncertainty, leading to lower liquidity. “After Brexit, things have slowed down," he said. "Foreign investors are still interested, but they are holding back a bit.”
Savills IM expects valuations to fall slightly in certain areas, he added, “but not to the extent that there will be a big run on portfolios”. Patel said the firm anticipates a drop in investment returns of some 5-10% spread out over the next 12 months, depending on the extent to which policy-makers react to support the economy.
Yesterday the Bank of England cut interest rates to 0.25% from 0.5% and introduced further quantitative easing. The government may follow with higher investment spending to support the economy, noted Patel.
The biggest impact of Brexit will be on the office market, as some jobs are likely to shift away from London, said Patel. However, “retail should be a winner” as it will benefit from increased spending by foreigners due to the weaker pound. Logistics asset valuations are likely to remain robust, he said, since “you can’t stop the e-commerce trend”.
When it comes to residential property, it’s less clear. “It’s strange how [shares in] housebuilders have been hit hard,” noted Patel. Shares in residential property developer developers fell some 25-30% immediately after the Brexit referendum, but rebounded in July and are now down around 15%, he said.
What house prices will do will come down to whether more people will want to come to live in the UK versus the ability to finance purchases, he added.