Pricing and supply are biggest obstacle to real estate investment in UK, not Brexit

Germany and Spain could overtake UK as preferred real estate investment markets for 2018 due to pricing and supply issues rather than Brexit, a new survey suggests.

The poll of 148 leading real estate investors representing organisations with an excess of £300 billion of real estate assets under management conducted by Knight Frank shows that based on a three to five year hold some 28.5% of investors identified Germany as their preferred investment market in 2018, up from 27% in 2017.

This was followed by Spain, identified by 20%, despite the current political instability caused by the referendum on Catalonian independence. Just 12% of investors, most of whom are London based, identified the UK as their preferred investment market, ahead of France at 9%.

The survey indicates that political uncertainty caused by the UK’s exit from the European Union is not the primary concern for investors. Just 16% of those surveyed identified continued geo-political uncertainty as their primary challenge.

It found that over 66% believe pricing and lack of available stock to be the biggest obstacle to placing capital in European real estate during 2018 and an additional 11% cited competition from overseas investors as the main challenge they will encounter in the next 12 months.

While investors were cautious on the outlook for the UK in 2018 some 58% stated that investor demand for commercial real estate across Europe would be stronger in 2018 than in 2017.

Over half, 51%, identified the industrial and distribution sector as the most compelling, followed by specialist assets such as automotive, student accommodation and healthcare at 28%. Just 15% of respondents will prioritise office assets in 2018, and only 2% retail. Hotels, widely seen as a defensive asset class, was only identified by 3% as the asset class of choice for the next 12 months.

‘In this low yield environment, demand for commercial real estate assets shows little sign of abating. Indeed, investor sentiment suggests we could see transaction volumes in 2018 exceed the €220 billion recorded this year,’ said Chris Bell, managing director for Europe, at Knight Frank.

‘It is also encouraging that European investors are divorcing politics from the underlying economic and market fundamentals, which remain good, when setting their strategies for 2018. In Spain, for example, investors recognise that uncertainty around Catalonia independence risks masking a resurgent Spanish economy, and growing demand for office and industrial space in particular,’ he pointed out.

‘In the UK the picture is more complex still. Certainly, Brexit has changed the current and future dynamic of the UK investment market, but the overriding concern for investors is pricing, driven by competition from private and foreign buyers seeking a currency arbitrage. As a result, we expect to see investors looking beyond London to regional cities to find value,’ he concluded.