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UBS Group AG expects the wave of office buildings under construction in London is more of a threat to values and rents compared to the risk of companies moving out following Britain’s decision to leave the European Union, reported Bloomberg.
“We saw a build-up of an oversupply of office space long before Brexit which can’t be stopped,” said Thomas Wels, global head of real estate at the Zurich-based bank’s asset-management unit.
Wels noted that the additional space is expected to enter the market in 2017 and 2018 and “isn’t priced into rents”.
Capitalising on rising rents, developers began construction on 51 office projects in central London in the six months through March, said Deloitte LLP in a May report, adding that the amount of space being developed nearly doubled in 18 months.
Green Street Advisors LLC, on the other hand, expect values to drop by as much as 20 percent in London as companies consider delaying expansion plans or transfer some of their operations to continental Europe following the vote.
International businesses may move up to 100,000 jobs away from London in two years of the UK starting a process to leave the EU as they risk losing passporting rights, said Mike Prew, an analyst at Jefferies LLC.
On 4 August, UBS London-based analyst Osmaan Malik wrote that commercial property values in the UK probably had their steepest drop since December 2008 in July after the Brexit vote.
Office prices in London’s financial district fell 6.1 percent in July on heightened economic uncertainty, particularly for financial service firms, said CBRE Group.
With this, UBS will invest around US$3 billion in property in European countries other than the UK in the next two to three years, revealed Wels.
The International Monetary Fund predicts economic growth in the euro region to hit 1.6 percent this year compared with Japan’s 0.3 percent.
According to Wels, Asian pension funds will increase their allocation to real estate by targeting continental European property. In fact, he expects Japan’s top-ten pension funds to acquire US$200 billion of European property in the next ten years.
“In Japan, returns are too small, and the market isn’t big enough to invest domestically,” he said.
“In Europe returns are high, legislation is sound and investors can achieve diversification,” noted Wels, adding that he favours investing in multifamily properties, offices and stores in Italy, Germany and Spain.
Nikki De Guzman, Editor at CommercialGuru, edited this story. To contact her about this or other stories email nikki@propertyguru.com.sg
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