What activity did you see in real estate investment following the Brexit vote?
In the run up to the UK’s referendum on EU membership last year, we saw much quieter activity than we had seen previously. Investors were still looking at real estate opportunities but they weren’t committing.
This really started in February 2016, and went on through to the 23 June referendum and until about eight weeks after the vote.
From then on, the shock was still settling in, but suddenly it was as if a huge floodgate had been opened. We had huge quantities of money coming into UK real estate, particularly from Asia. What triggered that was a combination of softening in real estate prices and the fall of the pound. The combination of the two made UK real estate look 25 to 30 percent cheaper.
When you are a pension fund investor with a 20- to 30-year horizon, you can afford to ride out short-term fluctuations. I think investors saw it as a real contrarian investment opportunity and invested in significant quantities.
What about in Jersey?
Jersey saw about $20 billion of new funds in Q4 2016, an increase of almost 9 percent of our local fund stock.
Real estate is Jersey’s single biggest alternative asset class, delivering approximately £500 billion of foreign direct investment to the UK and around €188 billion to Europe, with most of it going into commercial real estate, mainly from the US, Asia and the Middle East. We have two iconic developments in London that are Jersey structures, The Shard and Battersea Power Station, as well as elements of the Olympic Village.
How are investors reacting to political uncertainty in 2017?
I think real estate investors tend to take very long views. If they buy a major piece of real estate, often they take a buy-and-hold strategy, and asset managers and institutional investors are becoming increasingly used to living in a world of uncertainty. They can’t stop their core activity, but can turn the uncertainty to an advantage.
Through monitoring volatility, they can afford to be very selective about when they acquire and seek cheaper values, helping to sustain them through uncertainty over the long-term. We are seeing careful priming of funds and quite selective interventions.
The shock factor has worn off as far as Brexit is concerned. The fact the UK economy has since confounded the pundits and has performed the strongest of the G7 has made investors question the expertise of economists. They are re-evaluating fundamentals and starting to rely a little bit less on algorithmic models and a little bit more on their own judgement.
However, there is no doubt that competition is increasing. Abu Dhabi, Frankfurt and Paris are all pitching for London’s business.
What role will Jersey play post-Brexit?
Jersey is a part of Great Britain but not politically part of the UK, so that means we are not involved in Brexit directly. Our relationship with Europe relies on individual bilateral agreements that have been negotiated over 40 years.
We have gone through two comprehensive assessment processes with the European Securities and Markets Authority and deemed to be equivalent to European funds in terms of substance transparency and regulation.
Our market access won’t change post-Brexit. For Europe, we can provide a conduit into the UK, and equally, we can provide a pathway for investment into Europe. It makes use of our relationship with both, meaning in the short term we will probably see more use of Jersey as a jurisdiction.
We are very keen to support the UK, whereas the competitive sentiment from the continent seems to be: ‘Either do it in London or do it here.’ We are taking the view that we are a junior partner in a very important relationship.
London is a clearinghouse for international business so we don’t just deal with the funds industry. The city also supports around 250,000 jobs in the UK through the economic multiplier effect, which creates about £14 billion GDP for the British economy and about £5 billion in tax annually.
What will we see from foreign investors outside of the UK and Europe?
Some funds are so interested in the UK that they might give up on some continental European countries. If you look at where investment in Europe is raised for alternates, three countries comprise 60 percent of the investor base: Switzerland, the UK and the Netherlands. The rest are smaller investors into long-term real assets and tend to stick to conventional assets. As a consequence, the US will be more concerned about what Britain does as opposed to Europe.
We have seen a number of US real estate managers that are investing in Europe and have become a little unsettled by the complexity of regulations. They are used to being so well known that clients will come to them to put money in their fund, but that construct has come under pressure in Europe because regulatory authorities are challenging them. It is because of this that we started to promote in the US a bit more proactively. As a result, we are seeing more interest from US fund managers that want to market and acquire assets in Europe.
What opportunities and challenges do you anticipate arising going forward?
We are still seeing a lot of investor interest despite political turbulence, which does create uncertainty, but there are some counter pressures that are driving greater allocation towards alternatives, particularly private equity, real estate, hedge funds and infrastructure.
This is being driven by minimal cash returns and record numbers of baby boomers retiring. Many of the big pension funds are now having to realise their obligations to retirees, and they are desperate for a return because the conventional asset classes have not performed too strongly for them, meaning we have seen a progressive increase towards alternatives.
Allocation towards real estate was around 3 percent when I first started out. Then it jumped to 5 percent and then to 8 percent, and now it is in the teens. An institutional investor is now likely to have 15 to 20 percent allocated to alternative assets, because they are where the real returns are.
Despite the political uncertainty in the world, the underlying drivers for investors are still strong. As volatility in currencies and oil prices increases, dollar-based investors will look overseas and outside of America for real estate opportunities. We will get a further surge of investment from US institutions in Europe as, on the whole, the continent is not economically strong, which should mean US institutions can find value in real estate development.