Business must go on. You may be buoyed by Brexit, suffering Regrexit or in deep Bremourning. Whichever. Get over it. We've all got jobs to do, clients to serve, and opportunities to grasp. Markets are fuelled by confidence. If we believe this is Nightmare on Nigel Street, it will be. There will be short-term turmoil, but we have highly relevant and recent experience. We survived the Lehman's crash. If we could sidestep the Big Short; we can brave Big Boris.
So, as we move into Brexitland, where will there be opportunities?
Markets always over correct. Fitch are calling a 25% fall in UK house prices. Others predict a soberer 3-5 % decline in real estate values. Which will it be?
Mark Carney channelled Mario Draghi on Friday. He announced the Bank would do anything necessary to preserve market liquidity and promptly made an extra £250 billion available. This decisive action will probably be followed by a July rate cut - perhaps to zero. Low interest rates, which tend to buoy asset prices, will offset falling investor confidence and demand. So my money is on a medium-level decline in values.
But there will still be mispricing opportunities. Aberdeen's Martin Gilbert nailed it well: no knee jerk reactions - stay calm and take advantage. Those with buying war chests will be busy. They will be even busier if low sterling fans inflation and the Bank hikes interest rates to fight it.
Opportunities from Sterling
On Friday morning, the pound fell to its lowest level since 1985. Our Hong Kong office immediately had investors enquiring about UK real estate opportunities. They had spotted what the UK was only just realising. We had voted to go back to 2009: falling prices, weak sterling and low interest rates.
This is the water in which inward investors swim. Pared sterling means profit on entry. Sovereign wealth funds and non-sterling entities will now scour the UK again for real estate opportunities.
U.S. Private Equity
Private equity houses thrive in uncertain economies. Many had moved on from the UK real estate market because it was late cycle and highly priced. Their purchasing war bands were off chasing yield in Spain, Italy and even Greece. That has changed utterly. As elevated economic risk pushes out yields, we will see Blackstone, Elliott and Oaktree buying again in the UK market. One person's Brexit is another's bonus.
Build to rent
The Build to Rent sector had a sluggish start in the UK. BTR operators couldn't compete with the high prices house builders were paying for land. They were also disadvantaged by the Buy to Sell market being pumped-up by Help to Buy.
Now could be BTR's big moment. Major U.S. operators, such as Greystar, are already poised in the UK. The sector was kick started in the States when land values fell in the 90s. Expect BTR operators to buy from (and joint venture with) major land-bank holders: local authorities, supermarkets and even the house builders.
Patient institutional capital will be key to a potentially cash-strapped country. Given the right investible proposition, institutions can deliver long-term funding for housing, transport and utility infrastructure and difficult developments. Straitened government spending will open opportunities for institutions to fill the funding gap in the alternative asset space.
Investors will be attracted by weak sterling, mispricing and London's enduring global stature. Nonetheless, there are challenges. Today, London's lure as a safe-haven city has been soured. However, without sounding too Faragist, London survived the Blitz and will survive Brexit. Brexit London will be a buyers’ market alive with opportunistic purchasers. Short term though, occupier demand is likely to fall - taking rents with it.
Overseas banks and financial service companies using the UK as a base to gain “passported” access to EU markets employ over 120,000 people. They will be looking at all options to keep these EU passports. There will be work to do helping them with space, relocation and product solutions.
House prices are a British religion. As the referendum result came in, UK house builders’ shares fell sharply. However, government policy has centred on inflating the UK housing market as a stimulus to the wider economy. As at December 2015, 40% of new house purchases were supported by Help to Buy. A sharp fall in the housing market would be a further political disaster for the government.
So if the government has the money, it will strain every sinew to support house prices. Coupled with low interest rates, that may be enough to mitigate falls. There will be some opportunities to buy from pressurised house builders, but no purchasing fest like 2009.
Brexit is Britain’s biggest revolution since Attlee's government created the welfare state. Change on this sweeping society-convulsing scale is supremely rare. But there will still be winners in Brexitland. We must make sure UK real estate is one of them.
Originally published by CoStar.