Brexit – should we be worried?
Total Property - Issue 5 2016
Brexit has exposed UK commercial property funds as a weak link in Britain’s economy with many funds now stopping investors from withdrawing money or revaluing their portfolios amid fears that real estate values in London will plunge. Experts are warning that about £5 billion worth of commercial property could be put up for sale.
Investment in UK commercial property has slumped to its lowest level in two years, with Cushman & British commercial property funds allow people to invest in big developments like office blocks, warehouses and shopping centres, which normally rely on money from major professional investors. So far eight fund managers have stopped investors from withdrawing their money or have cut the value of their funds with a total of £18 billion in property funds suspended.
Wakefield reporting that a third of commercial property deals under way at the time of the EU referendum have collapsed or are under renegotiation.
Funds have closed because commercial property assets are hard to sell quickly. Imposing, restrictions, or “gates” as they are known, allows fund managers time to sell their properties. No “gates” would quickly result in fund managers being forced to sell assets at fire-sale prices which would reduce the value of the funds and trigger more withdrawals from worried investors.
The last time UK property funds suspended trading, in 2008, they were closed for about six months. Funds are unlikely to lift their suspensions until they can build up a sizeable cash position to cope with withdrawal requests and it could again take up to six months to sell Britain’s commercial property in the current climate.
The Bank of England has warned further suspensions in property funds could hasten a fall in commercial property prices. In addition, uncertainty in the commercial property sector could quickly feed through to homebuyers, who might decide to pull out of transactions.
Worryingly, about 75 percent of UK small businesses use commercial property as collateral for loans. Banks also use commercial property to count towards their capital buffers but big banks are less exposed to commercial property than smaller players.
Investors believe commercial property values will fall but its severity depends on Britain's negotiations with the EU and how a good a deal it secures along with the health of the UK economy.
A bad deal could threaten London’s status as Europe’s financial services capital, and throw the commercial property sector into further turmoil as banks and related businesses look to move elsewhere.
The good news for New Zealand is that exposure to UK funds is low, mostly through investments from Kiwisaver and ties New Zealand banks have to their British counterparts.
Also turbulence in the UK may be an opportunity for New Zealand’s commercial property market to enhance itself as a safe place to invest funds. Our Government is stable, making the country extremely attractive to investors who are worried about parking their cash in Britain, or the EU, while Brexit negotiations play out between the two over the next half a decade.
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