MIPIM, 14 March 2016 – With fallout from the UK’s Article 50 notification imminent, a new report from global real estate advisors, Colliers International, concludes that the greatest risk to the stability in the UK commercial property market is not a ‘Brexit’, but the policies that Donald Tusk, President of the European Council and Donald Trump, President of the United States, may introduce in the coming year.

In “In the Balance: United Kingdom 2017” Colliers identify EU fragmentation and US economic policy as the biggest risks to the future of the UK commercial property sector which, despite entering a normal cyclical slowdown, is otherwise being buoyed by powerful macro factors such as the sheer weight of global capital seeking yield, global demographics adding more to savings and pension pots, low interest rates and low bond yields.

In 2016, total global direct commercial property investment amounted to £960 billion, of which the UK benefitted from £50 billion, 30 percent down on 2015, but £5 billion above the 10-year average. In 2017, Colliers forecast that UK investment will reach the 10-year average of £45 billion and, with a fair wind, will match 2016 performance.

Richard Divall, Head of Cross Border Capital Markets, EMEA at Colliers International comments; “The remarkable feature of Brexit has been its limited impact on UK occupier markets. Net absorption data for London suggests that occupier markets have only marginally weakened, and much of this can be linked to the banking and finance sectors who were already in the process of downsizing expensive Central London exposures by ‘north shoring’ back office functions.” 

European Risk
Despite the substantial forces supporting global real estate and UK real estate in particular, there are numerous risks that shape the views of even long term property investors explains Walter Boettcher, Chief Economist at Colliers International: 

“In the UK, media attention has been centred primarily on ‘Brexit’, but this risk to investors is a small part of a much larger risk of wider EU fragmentation and new Eurozone instabilities. Growing nationalism in key countries such as France, Italy, and the Netherlands, among others, poses large risks to Donald Tusk’s mission to push forward EU political unity. Many EU members are wishing to re-claim national sovereignty in many areas, including re-establishing national currencies. In fact, the UK’s notification to leave is looking increasingly as confirmation of EU political mismanagement.”

While London’s finance sector may be at risk by losing its ‘passport rights’ to EU markets, the EU is at risk of losing a major part of its financial infrastructure that is not readily reproduced outside of London. 

“When contemplating relocation, businesses - particularly financial institutions - may focus on the availability of talent, but access to communication and technical infrastructure to support payment systems, clearing facilities, trading platforms and other pieces of financial ‘plumbing’ are also key. Therefore, any transition to Europe looks set to evolve slowly, irrespective of what the politicians may want or expect. Consequently, investors are not likely to see a sudden market dislocation,” adds Divall.

Key questions still remain as to whether EU political unity, spearheaded by Donald Tusk, will ignore these market pragmatics.

“Given the EU’s commitment to European capital market integration as part of a wider target of global capital market harmonisation, it is hard to see what the EU’s alternatives are. Serious questions of mutual UK/EU risk are giving rise to a new force that, despite all the political bluster, might best be described as ‘recognition of reciprocity’,” said Boettcher. 

US Risk

“Of equal, if not greater risk to the UK property market, is the unknown of US domestic and international policies. The potential for global capital diversion to the US is substantial given the possibility of new protectionist trade policies, deregulation of US financial markets, new corporate friendly tax policies and a much anticipated fiscal stimulus linked to large-scale infrastructure investment,” explains Divall.

These initiatives have the potential to absorb a sum equal to the total of all global institutional funds presently allocated to global real estate ($5 trillion). 

Divall concludes: “The bigger question is whether US foreign policy will enhance access to global capital pools or restrict access. The evidence, so far, suggests the latter and that prime markets in the UK and other parts of the world are likely to be beneficiaries.”