What exactly has Brexit done to UK investment?

London might have grabbed headlines over the past 24 months, but a look at the wider UK investment picture post-Brexit reveals a regional resurgence underpinned by investors seeking value. The battle between the 33 boroughs and the rest of the country for investment spend over any given two-year period is always closely fought, and the past 24 months has seen regional activity edge ahead of the capital. This may be surprising, given the billion-pound-plus deals that went through last year – for the Cheesegrater and Walkie Talkie, in particular – and the amount of capital we know is still targeting London, but the reality is that quieter periods either side of the 2017 boom have affected London’s share of investment capital. Subdued activity in two key sectors has had a noticeable impact on how the wider investment market looks statistically. Figures from Radius Data Exchange show that investment has dropped 32% over the past two years, in comparison with the 24 months leading up to the referendum. Concerns over declining rents and disconnects in valuations as well as the widely publicised issues around retail property have led to relative inertia in the shopping centre market, which has historically been a huge fillip for overall UK investment volumes. A similar situation has emerged in London offices in the first few months of 2018, though this is not underpinned by quite the same level of concern over occupiers – more by a lack of availability following a handful of headline-grabbing sales to overseas buyers completing in 2017. Intelligence provider PreQin indicated in the first quarter of 2018 that “dry powder” held by private real estate companies globally had hit a record $266bn. However, for specifically European-focused funds the figure actually fell by $5bn from the end of 2016. There’s no specific UK metric detailed, but one can surmise that while the country undergoes reconstructive political surgery there will be investors mirroring high-profile British firms in altering their strategies when it comes to deploying capital in the UK property market – not only in terms of expenditure, but also in the matter of which sectors they are targeting. British Land, for example, has recently been in talks to buy residential operator Fizzy Living as part of a burgeoning move into the UK private rental market. This comes as the REIT has also looked to offload more traditional holdings – most notably four major retail parks. Elsewhere, the Crown Estate is looking at entering the co-working sector, and L&G recently launched an affordable housing arm. While all this diversification has been taking place, what we would call “traditional” property sectors have seen investment activity fall away, culminating in that 32% drop-off indicated by our data. There has been an overall slowdown in deals volume as well as total spend, with the number of deals done in London falling by 40% over the past two years compared with the same period before the referendum, whereas outside London volumes have dropped by only 9%. Pricing clearly has something to do with this – as the average outlay for a commercial asset has decreased in the regions over the past two years by 22%, down to £5.2m from £6.7m. London, meanwhile, has seen an increase in average price – up by 6% in the two years after the referendum vote, from £32.8m to £34.8m – making the capital more than six times as expensive as the rest of the country on face value. This divergence in price between London and the regions has been building over the past decade, but what Brexit did to accelerate that was largely in the currency shift from summer 2016 through to 2017 – enabling those big office purchases to go through for Asia-Pacific investors, who remain by far the most active in the London market. Whether the rest of the world will follow their lead once a clearer political landscape emerges in March 2019 remains to be seen. But beyond all the glitz and glamour of London trophy deals, there is a picture emerging of regional value-based investments growing in appeal, and commanding much more attention from investors than we are giving them credit for. To send feedback, e-mail graham.shone@egi.co.uk or tweet @GShoneEG or @estatesgazette