“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.
In the residential property sector, the tremors are already cracking the last illusions. But again, don’t just blame Brexit. Read… London Housing Bubble Melts Down
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Assuming these poor oligarchs have run out of places to invest their stolen billions, I truly feel sorry for them.
Even rising seas from global warming has made it difficult to build private mansions on white sandy beaches and sensitive aquifers, these guys deserve some kind of financial relief for these environmental problems caused by the rest of humanity.
Is it true George Bushes daughter owns many thousand hectares of the best aquifer land in South America? I bet she’s gravely concerned about the future of this pristine wildlife habitat.
The Bushes own over 200K acres of land in Paraguay, the most lawless place in all of South America. Water is probably the least of what they are up to.
And with vast quantities of glyphosate being slathered all over Latin America, maybe their aquifer won’t be such a deal after all.
“Even rising seas from global warming has made it difficult to build private mansions on white sandy beaches and sensitive aquifers”
Nah… just get FEMA insurance (taxpayer backed for the normally uninsurable).
“Nah… just get FEMA insurance (taxpayer backed for the normally uninsurable).”
Yes, but only if they’re accredited investors, we can’t afford having a free-for-all for every Tom, Dick and Harry for crying out loud.
Here in UK commercial property investments have been overvalued for at least a year, probably longer. All that Brexit has done is provide a lebgitamate excuse for valuation surveyors to publicly confirm what they must surely have been privately thinking.
The property funds only, have themselves to blame, albeit they will blame the market. As one of the keybdrivers of demand for commercial property investments, they are now out of the market. Why should other investors bail them out when presented with forced sale prices other investors can get them on the cheap.
More of my comments here :
“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.” That would make it seem as if the central banks were disinterested, if misguided entities. The fact is they have been providing trillions, virtually interest-free to the very banks which own them, and largely to hoover up hard assets at low rates no one else has access to. Characterizing it as an attempt to “inflate asset prices” is misleading at best.
A really outstanding source of information on the machinations of the financial world is found at Pam Marten’s Wall Street on Parade web site. Just today, she comments on what could only be pried out of our central bank, the Fed, by lawsuit:
Mark Pittman was one of those reporters. His stonewalled Freedom of Information Act requests to the Federal Reserve led to Bloomberg News filing and winning a Federal Court case against the Fed. The Fed was forced to turn over documents showing that it had secretly funneled a cumulative $13 trillion in below-market-rate loans to Wall Street banks and foreign banks during the financial crisis. Pittman died at age 52 in 2009. (A Bloomberg News story carried in the Washington Post at the time of his death reported that “He had heart ailments, although the cause of death was not immediately clear.”)