London’s commercial and residential markets are likely losers because the city is expected to shed jobs.
The effects of the U.K. vote to leave the European Union are starting to ripple through property markets as investors pile out of publicly traded real-estate companies in Britain and Europe and global developers begin to reassess projects and transactions already in the pipeline.
Listed companies have lost tens of billions of dollars of value amid growing fears of slack demand for office buildings, hotels, stores and other property in a less-integrated Europe. Weakening credit markets, meanwhile, are likely to hamper deals in the industry, which relies heavily on free-flowing debt.
The news isn’t bad for all property owners. While London’s commercial and residential markets are likely losers because the city is expected to shed jobs, office and residential landlords in other cities—such as Frankfurt, Paris, Dubai and Singapore—could benefit if companies relocate operations there, according to analysts and developers.
Top industry players say it likely will take years for the full impact to be felt in property markets.
But opportunistic investors already have begun to circle, remembering well the outsize profits fast-moving buyers made in the aftermath of the last two recessions. “Turmoil is an opportunity,” said Hamid Moghadam, chief executive of Prologis Inc., Europe’s largest owner of industrial space.
The Brexit vote already is having a short-term impact on leasing and sales deals as decision makers, uncertain about how the U.K. and EU will proceed or what the economic consequences will be, wait for clarity.
Investors have punished the shares of the world’s biggest commercial real-estate brokers—CBRE Group Inc. and JLL—on the expectation the uncertainty-driven pause in trading will persist.
“It’s hard for me to find any positives in the short term for leasing and investment sales,” said Mitch Germain, an analyst who covers the sector for JMP Securities.
Europe’s commercial-property markets were beginning to slow at the time of the Brexit vote, after seeing an influx of foreign demand in most major cities during much of the recovery from the financial crisis.
Last year, investors purchased €300.7 billion (about $332 billion) of European property, up from €224.5 billion in 2014, according to data firm Real Capital Analytics.
This year demand started to ebb. In the first quarter of 2016, only €46.9 billion of European commercial property changed hands, compared with €74.9 billion during the same period last year, Real Capital says.
In the short term, transaction volume is expected to slow even further.
“I think it’s going to be really hard to talk sellers who have good assets into selling in this turmoil,” Mr. Moghadam said.
Before the Brexit vote, most European real estate was holding its value, with the biggest exception being high-end London condominiums and mansions. Now, more widespread price declines are expected, with London office property leading the list.
In all, London could lose 100,000 jobs to Europe, according to an estimate from Jefferies International Ltd. Green Street Advisors, a real-estate tracker, estimates that weakening demand will push London office values down by 15% to 20% over about 18 months.
Shares of the two biggest U.K. real-estate investment trusts, Land Securities PLC and British Land PLC, tumbled 17% and 24%, respectively, since markets closed last Thursday, the day before referendum results were announced.
Shares in the biggest U.K. home builders Monday were temporarily suspended after steep losses. Persimmon PLC shares are down 36% since the close Thursday. Other home builders like Taylor Wimpey PLC, Barratt Developments PLC and Berkeley Group Holdings PLC also have taken big hits.
Swelling supply is adding to London’s problems. Construction started on 51 new London office buildings from October to March, a record in the 20 years Deloitte LLP has tracked the market. Total office space under construction in London—14.2 million square feet—is greater than any time since early 2008, according to Deloitte.
But some projects in the pipeline could get shelved, including a 62-story tower planned at 22 Bishopsgate in London’s financial district. Axa Investment Managers, which is leading the group of investors on the development, is re-evaluating its plans for the project after the Brexit vote, according to a person familiar with the matter.
The planned groundbreaking on that project “could get prolonged if demand really does fall in the way that we think,” said Hemant Kotak, a managing director with Green Street Advisors, which isn’t involved in the development.
The Crown Estate, which has managed the property portfolio for the British royal family since 1760, will take Brexit into account during a review of two London development plans yet to start, said Paul Clark, director of investment and asset management. One is a new office block, the other is a residential and retail redevelopment.
“Plainly, given the circumstances, we need to review our schemes,” he said.
The U.K. residential market is also poised for a slowdown. “London will feel the biggest impact,” said Richard Donnell, director at data firm Hometrack.
London homes became one of the hottest global assets during the recovery from the financial crisis, due in part to an influx of wealthy investors from Asia and the Mideast.
Prices in the poshest districts have been falling this year, with Knightsbridge prices down 7.5% in May from a year ago, and Chelsea prices 3.5% lower, according to broker Knight Frank LLP. Green Street estimated a Brexit vote would push home prices in London down 10% to 20%.
Foxtons Group PLC, a residential property broker focused in London, warned Monday that its 2016 earnings will be significantly lower than last year. Its shares were down 37% from Thursday’s close.
On Friday, Ben Miles decided it was time to sell his four-bedroom house in suburban Honor Oak Park, about 5 miles southeast of London Bridge.
“With the extremely severe economic repercussions I’m predicting, I’d rather be first to the market,” said Mr. Miles, 36 years old, who works in tech sales.
The Brexit vote immediately altered the sentiment of some house hunters, said Paolo Ulivi, director of property broker Pickwick Estates, which has two offices in south London.
Last Saturday, Mr. Ulivi scheduled viewings for a two-bedroom condominium in Honor Oak Park listed at £485,000. A month ago, he would have expected at least 20 people to sign up. Only six were scheduled for Saturday, and only two showed up, Mr. Ulivi said.
Any weakness won’t be limited to London. The sharp decline in the value of the pound will likely curb travel by U.K. residents, potentially hurting European hotels.
But there are others who stand to benefit. The weak pound could boost tourism in the U.K., juicing retail sales and demand for hotels there.
New York apartments also could enjoy a boost if investors worried about buying property in London turn to other markets.
“Foreign capital is going to seek U.S. investment,” said New York developer Steve Witkoff. “You had so much capital that thought London was a safe harbor now waking up and thinking: maybe not.”
In China, some investors considering London properties see Brexit as a buying opportunity. Chinese conglomerate Fosun Group, which has multiple investments in Europe including property, said it would “proactively grab opportunities for value investments.”
Meanwhile, investors around the world are likely to watch and wait.
“Nobody is rushing to do anything,” said Craig Hughes, global real-estate leader at accountancy firm PricewaterhouseCoopers. Brexit “has brought huge risks, but also major opportunities.”
Source: mansionglobal.com, originally published by The Wall Street Journal