Stock markets are predicting disaster in London property prices post-Brexit
Scott Crowe, Chief Investment Strategist at CenterSquare, told Business Insider that financial markets are pricing in a 15% collapse in the value of commercial real estate in London as a result of the Brexit vote.
Bloomberg reports on Friday that Stephen Vernon, chairman of Green Property, said at a conference that London property values are collapsing, creating a potentially "fantastic" buying opportunity.
Green Property, which made a fortune selling Irish property before the bubble collapsed in 2008, has closed its London office for now and is waiting for prices to go lower before re-entering the market.
Crowe told Business Insider: "We've gone back and we've looked at every single real estate correction in the last three decades in the UK. What the market is pricing in now is the second worst correction in commercial real estate prices after the great financial crisis. It's on par with the commerical real estate downturn that we actually saw in the early 1990s."
CenterSquare is the real asset arm of US bank BNYMellon, with approximately $10 billion in assets under management.
Crowe says his view is stock markets are "over discounting" the fall in London office and shop space value. He says: "What we're seeing right now is the market is forecasting a 15% plus decline in real estate values, which we think is unrealistic.
"We think rent is probably going to fall 5-10%, but mitigating that is two things. The first is the fact gilts have come in since Brexit making real estate debt costs cheaper. Certainly, capital availability from the banks for commercial real estate hasn't changed, so that's supportive of valuations. And secondly, the pound has also corrected by 15%. The pound and gilts are really going to be the shock absorbers for the market, even though office rents, particularly City office rents, are likely to correct.
"So what we expect is a single digit decline, something like 5%, in commercial real estate values. That all sets up to make the UK REIT market relatively cheap, particularly on a global basis."
It has $1.5 billion invested in European Real Estate Investment Trusts (REITs), with about half of that in the UK, Crowe says.
London-focused REIT Great Portland Estates is down over 18% since the June 23 referendum on Britain's membership of the European Union, while Derwent London is down over 27%.
Crowe says: "If you look at the evidence to date, it certainly supports our point of view. We had about two weeks of stress - some of the open-ended property funds had to put gates up, close the fund, and sell some assets. Those assets came on the market at a maximum of about 10% discount to prior valuation. They were scooped up very, very quickly by large institutional buyers. We really haven't seen any more selling since that two weeks of distress."
At least nine UK-focused investment firms suspended trading in their property funds or market down prices in July, freezing £15 billion ($19.4 billion) of assets. It came after panicked investors rushed to withdraw money in the wake of the Brexit vote. Funds were forced to hold a fire sale to raise funds to pay back investors.
But Crowe points out that inflows recently turned positive for the first time since the vote, meaning investors are note putting more money into UK property than they are withdrawing.
Much of the decline in London-focused property stocks and funds has been driven by a fear that the capital is about to lose its status as the financial capital of Europe. EU officials have repeatedly signalled that Britain can't keep financial passporting rights unless it accepts Freedom of Movement, something that is seen as highly unlikely. 5,500 British firms with a combined turnover £9 billion rely on passporting to sell services and products to Europe, according to the FCA.
The loss of passporting rights would therefore likely lead to the loss or relocation of thousands of jobs out of the UK. JPMorgan, UBS, and the head of the British Bankers Association (BBA) have all publically warned this is the case and Goldman Sachs is said to be considering relocating as many as 2,000 jobs. France and Germany have also been publicly wooing finance firms to get them to relocate.
Crowe is sceptical. He says: "If they took 10% of the financial industry in London and put it in Frankfurt, they'd almost double the size of the industry there. There's almost no other city in Europe that has the scale. Paris is not going to be the next financial capital of Europe. The labour laws in Europe are a barrier for people setting up headquarters of investment banks in these countries.
"London's not going to go away but it is going to be diminished slightly. Some of these jobs are going to move to Europe."
He says that investors seem to have "thrown out with the bathwater" when it comes to property prices in London's West End, saying: "I think the West End is going to be much more resilient than the City."
Shaftesbury, which owns 14 acres of the West End, has fallen 28% since the Brexit vote.
Crowe says: "Stock markets hate uncertainty and they always over discount it. That's where you have an opportunity as an active manager. I don't know when the stock prices revert to their underlying fair value but I know they will. It's a question of when not if."