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Pain or gain? How UK commercial real estate is coping with Brexit

Two weeks after seven funds with stakes in U.K. commercial property suspended trading in the wake of the U.K.'s Brexit vote, only one, Aberdeen Asset Management, has reopened for business.

And investors will have to pay a heavy price to wrest themselves free from the Aberdeen fund: There's a hefty 17 percent liquidity premium added to sales costs and a long-term fair value adjustment.

This makes the overall discount – or "total property asset reductions" in Aberdeen's words – equate to 26 percent. So for every pound you had in the fund on the day before the referendum, you only receive 74 pence if you want it today. Still, the possibility to redeem at all is an advantage over those investors who bought into peer funds which have given no indication of when the withdrawal ban will be removed.


The gated funds have also proceeded with announced mark-downs on the value of their underlying holdings, with a drop of around 5 percent more common.

Legal & General tapped investors with a sorely needed piece of (relatively) good news on Monday, reining back its post-Brexit vote discount from 15 percent to 10 percent.

At any given time, these funds generally have around 10 – 15 percent in cash or liquid shares – although given some of these shares are held in very highly correlated listed property companies, it is unclear how liquid these shares really are in times of crisis.

Nonetheless, given the rash of calls for liquidity, several of the funds have started selling their wares. Is now the time to swoop?

A resounding "Yes," according to some. Derek Jacobsen, Managing Director at Madison International Realty told CNBC that "the fundamentals in these markets are very interesting and remain very strong."

Madison has just raised $1.39 billion and intends to deploy a "disproportionate" amount to opportunities in U.K. commercial real estate.

Yet while vacancy rates for London office space hover around record low levels of 3 – 3.5 percent, some caution that a rush of both newly built, as well as speculative, supply still in early-stages of development will soon be flooding the market, affecting those dynamics and hitting rents.


The City of London at sunset
Allan Baxter | Photolibrary | Getty Images
The City of London at sunset

Jacobsen remains sanguine, saying: "There's definitely some supply coming online but I don't necessarily think that will change much as there is a significant demand for space, especially in prime areas."

Uncertainty regarding the strength of the City of London once the U.K. leaves the European Union also has many insisting the outlook is currently too murky to be buoyant about commercial prospects.

But Jacobsen says Brexit is not actually as significant as some suggest and could simply be "the impetus for a bit of a correction."

Regardless of the referendum, however, there are many, including analysts at Société Generale, who say the property cycle is reaching its cyclical peak. In addition to vacancy rates potentially creeping higher if Brexit causes a financial sector exodus and given the new supply coming online, analysts cite a heady run-up in prices since a 2009 trough as factoring into their forecast for a near-term 25 percent plunge in U.K. commercial real estate prices.

But at heart, the differing views on prospects for the market are mostly split between those who see now as the optimal time to pounce and potentially snap up a bargain while others are too nervous to dip a toe in the water and those who believe drastic price reductions are still to come.

Longer-term, there is a far broader consensus that any pain to come will be merely cyclical.

Looking past the current uncertainty, Jacobsen's belief in the U.K. capital's long-term attractiveness is undaunted.

"You have to realise, London is really the hub of everything. People want to be here."


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