London office prices to fall 20% after Brexit vote

Bloomberg

London office-property values may fall by as much as 20 percent within three years of the country leaving the European Union as businesses relocate and the economy stagnates, according to Green Street Advisors LLC.
“New leasing will slow dramatically,” said Hemant Kotak, an analyst at the London-based research company. Retail-property values across the country could fall by 10 percent to 15 percent, Kotak said.
Shares of U.K. developers tumbled as the pound plunged to the lowest since 1985 following Britain’s vote to quit the EU after more than four decades. German real estate investment manager Union Investment decided against buying an office project in London’s main financial district following the vote because it creates rental uncertainty.
Investment in U.K. commercial real estate dropped by half in the run-up to yesterday’s referendum as potential buyers shunned deals. That was on concern that leaving the EU would encourage businesses to relocate abroad, leading to higher vacancy rates and lower prices in the U.K.
Investors spent 16.9 billion pounds ($22.5 billion) on offices, stores, warehouses and other commercial properties from January through May, down from a record 33 billion pounds a year earlier, according to Real Capital Analytics Inc. data.
“We are entering into a period of heightened uncertainty that no one can define or quantify,” said Adrian Benedict, investment director of real estate for Fidelity International. “It will most likely take several years for people to fully understand the implications of this.” London-based Fidelity International, which is separate from Fidelity Investments, manages about $1 billion of real estate assets, including $664 million in the U.K.
London represents the largest market for euro-denominated trading and banks with euro trading desks in the city may need to relocate some people to other locations within the EU, according to Patrick Scanlon, a partner at Knight Frank LLP. Deutsche Bank AG and HSBC Holdings Plc said prior to the referendum that they are likely to move some employees to Mainland Europe in the event of a vote to quit the union. JPMorgan Chase & Co., the largest U.S. bank, said it might move a quarter of its 16,000 British workers.
Derwent London Plc led declines. The company’s 17 percent drop was the biggest since 1994. Along with British Land Co., Great Portland Estates Plc and Land Securities Group Plc the London-based developer is among commercial property stocks most at risk from Brexit, Liberum said in a note to clients on April 15. The 16-member FTSE 350 Real Estate Trust Index was down almost 14 percent.
Investment in central London offices fell 21 percent in the first quarter from the year ago to the lowest in two years, according to research by Savills Plc. That was because international investors, who generally make up two thirds of purchases in the market, put off buying until after the vote.
There could now be “enormous potential” for foreign investors who have been waiting on the sidelines to buy commercial property assets, according to John Carrafiell, the co-founder of Green Oak Real Estate LP.
“This will create a buying opportunity in the short term as there will also now be sellers who are forced to exit the U.K.,” he said.