Losing your mo-jority
Uncertainty rules in the UK as a hung parliament affects investor confidence
The UK’s real estate sector is in the grip of uncertainty following the shock outcome of the country’s general election and the resulting hung parliament. As the initial exit poll was released on the evening of 8 June, political big dogs and business behemoths were quick to pour scorn on their accuracy, but as the night progressed and reality sunk in, the markets started to react.
Prime Minister Theresa May’s decision to call a snap election, announced on 18 April, was delivered on the premise that a landslide victory was on the cards. To many, the move was seen as an opportunistic one, set to increase the Conservative majority and hand May a platform from which to negotiate the hard Brexit she desired.
What actually ensued left the UK’s political landscape in turmoil. Over the course of the night, the Conservatives lost 13 seats, falling short of the 326 required for an overall majority and leaving investors pondering—as the were 12 months ago after the Brexit vote—where to go from here.
An understanding between the Conservatives and the Democratic Unionist Party (DUP), although it’s not yet clear what this might entail, means May looks likely to retain power for now. But the ad-hoc alliance will do little to allay the fears of investors, as reports of another possible general election before the end of the year have not, as yet, abated.
Hayley Scott of Investec Structured Property Finance, commented on 9 June: “Today’s election result will have a major impact on the real estate market as well as the wider economic landscape. Volatility and uncertainty may return to the sector.”
“A number of proposed new projects may indeed be put on hold as the property sector takes stock of this result. Banks are likely to be cautious about financing new developments.”
She added: “Real estate as an asset class will lose favour with institutional and overseas investors as doubts hang over the UK real estate sector.”
Philip Churchill, founder and managing partner of 90 North Real Estate Partners, took a more positive viewpoint, however, saying: “Whilst there is no doubt that some investors may remain cautious, I suspect that the Conservatives, by a margin still the largest party, will return a pro-business government and the vast majority of investors will continue their acquisition programmes, as the fundamental long-term attractiveness of the UK can survive short-term political shocks.”
Following a similar tone, Richard Gwilliam, head of property research at M&G Real Estate, believes once the fallout of the hung parliament has cleared, despite the uncertainty surrounding Brexit, UK commercial real estate is on a fairly steady footing.
Despite the potential of an alliance between the Conservatives and the DUP, there appears to be little faith among industry leaders and senior politicians that a partnership will improve stability.
David Docherty, fund manager for UK equities at Schroders, said: “Even if the Conservatives are able to form a government, this result significantly reduces Theresa May’s authority and her ability to negotiate Brexit.”
With these negotiations due to begin on 20 June, the attraction of a softer Brexit to institutional investors may not compensate for uncertainty that the UK now faces. However, some comfort may come from the fact that a second referendum on EU membership—called for by some of the contending parties—is most likely now off the table.
Lauren Kemp, senior manager at London Central Portfolio, said: “The uncertainty caused by a possible second EU referendum may have receded. In addition, the weakened position of the Conservative party, in conjunction with a pro ‘soft-border’ DUP, would suggest that the UK will be on course for a softer Brexit.”
Churchill added to this: “Since the Brexit vote, our international investors have continued to be attracted to the UK for real estate acquisitions, not least due to the relative value of sterling.”
Immediately following the results, the pound fell 2 percent to its lowest level since April and, while this was not as pronounced a drop as expected, currency volatility is set to remain over the next few weeks.
Azad Zagana, senior european economist at Schroders, commented: “The fall in the pound has been smaller than expected, given the hung parliament. At the margin, lower sterling will push up inflation a little further than previously forecast, which will have a small negative effect on household spending.”
Scott said: “As much as these political events drive fierce debate, investors will also place them in the context of other factors. These include the general global economic backdrop, the valuation of UK equities and bottom-up stock selection considerations.”
Considering this climate, and perhaps the perceived resilience of the UK economy given its plight of political shocks over the past two years, many still believe the institutional real estate industry in the country has the ability to cope with the current destabilisation.
Carol Hopper, partner in the real estate group at Ropes & Gray, agreed that it is not all bad news for investors willing to take a risk, a sentiment similar to that felt by investors following the Brexit vote.
Hopper said: “This result may well lead to a market correction, which could increase deal activity, as investors looks to sell positions and opportunistic buyers selectively look to take advantage of that.”
Gwillem added: “With the economy continuing to grow, investors should be comforted by real estate’s rental fundamentals, which benefit from ongoing (albeit softer) occupational demand and, for most markets, a lack of significant supply of space. UK property offers attractive yields, compared to both other asset classes and to other property markets globally.”
“The renewed cheapness of sterling also boosts the UK’s attractiveness to foreign investors. The election result does not change our belief that there will continue to be investor demand for core real estate in the UK, and that the weaker pricing for riskier secondary assets should provide interesting opportunities for some investors.”
In addition, investors will have a thread of positivity in knowing that the threat of Labour’s corporate tax policies has decreased, according to Kemp. She said: “The diminished threat of Labour implementing aggressive un-costed tax-and-spend policies will also be welcome both to business and investor sentiment, taking the edge off uncertainty caused by these election results. Significant tax increases targeted at property investors that Labour might also have instituted are now less likely to occur.”