by Wolf Richter, Wolf Street:
“Global Economic Uncertainty,” Brexit meet UK Commercial Property Bubble.
In July, a sharp mechanism started working: one of the hottest commercial real estate markets in the world, and one of the most expensive, began to deflate. And the hiss is deafening.
Capital values for offices in the City of London – the financial district of London – plunged 6.1% in July, from June, real estate firm CBRE reported today. In its monthly index, “capital value” represents the probable prices that would have been paid at the date of valuation.
And it extended beyond London: In the UK office values dropped 4.1% from June. Commercial property values overall – including office, retail, industrial, and other – dropped 3.3%, which chopped year-over-year growth to 0.4%.
“Capital value growth was always expected to falter at some point during 2016, as global economic uncertainty cast doubt on … strong growth seen in previous years persisting for much longer,” explained Miles Gibson, Head of Research at CBRE UK. “The Brexit vote has now crystallized that expectation, though it is not the only driver of it.”
Commercial rental value remained flat in July, and for the moment, given “this heightened uncertainty,” that’s “reassuring,” Gibson said.
The sharp decline in property values was foreshadowed by UK property funds that suspended withdrawals, one after the other, in early July, as panicked investors were trying to yank their money out. Seven funds at latest count froze a total of £18 billion ($23.5 billion), the largest asset freeze since the Financial Crisis.
The process was kicked off by funds managed by M&G Investments, Aviva Investors, and Standard Life Investments that suspended trading on July 5 and 6. It was followed on July 7 by Henderson Global Investors citing “exceptional liquidity pressures” given the uncertainty after the Brexit vote and the fund suspensions in the prior two days. Other funds chimed in. BlackRock’s UK property fund jacked up quarterly redemption charges on its fund to a punitive 5.75%.
These conditions will likely persist “for weeks and months,” fund supermarket Hargreaves Lansdown, which sells these funds, told its clients at the time. “Over half of the property fund sector is now on ice, and will remain so until managers raise enough cash to meet redemptions. To do that they need to sell properties….” And that “is not a quick or painless procedure.”
By attracting investor money from around the globe that then needed to deployed in commercial real estate, these funds helped inflate the property bubble in London.
At the same time, they were riding on the coattails of the financial sector that gravitated to the City of London, along with foreign investors, particularly Russian oligarchs who now too have fallen on hard times due to the oil bust. Meanwhile, Chinese investors haven’t arrived in large enough numbers yet to bail them all out.
As these suspended funds try to sell properties to meet redemption requests, they will put further downward pressure on property values.
And so ends the phenomenal property boom that started after the Financial Crisis when central banks around the globe began their harebrained policies of dousing the world with freshly printed money and free debt in an effort to inflate all asset prices no matter what.
Analysts have expected that prices would eventually “slip.” But they probably had more of a “plateauing” in mind, rather than a plunge. Then the Brexit vote happened, which put some oomph into the calculus. The Wall Street Journal:
Analysts have warned that London office rents could start falling due to Brexit, preventing foreign companies based in the U.K. from selling services in the EU. This could force firms to relocate to other cities in Europe like Frankfurt, Paris, Amsterdam, or Dublin.
Empty space left behind could push rents lower still, in turn making the office buildings worth less overall.
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