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UK real estate sector expects bounce in investment as election gives certainty

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UK real estate sector expects bounce in investment as election gives certainty

The U.K. Conservative Party's conclusive election victory should prompt a surge in investment and leasing activity in the country's real estate sector as investors and occupiers welcome the certainty it provides, according to several senior industry figures.

The Conservative Party, led by Brexit campaigner Boris Johnson, secured a 79-seat parliamentary majority mostly at the expense of the Labour Party, which had moved further left under the leadership of Jeremy Corbyn. The Labour Party, which offered a second referendum on the U.K.'s membership of the European Union, lost dozens of long-held seats in the country's North and Midlands that had voted to leave the EU in 2016.

The result means that the U.K. will almost certainly leave the EU at the end of January 2020, based on the withdrawal agreement negotiated by Prime Minister Johnson. Uncertainty around the U.K.'s departure and future relationship with the EU in the last year impacted investment and occupier activity in the real estate sector.

"The resounding victory for Boris Johnson's Conservatives in the U.K. election will provide business and the property industry with a degree of much needed certainty," Jon Neale, head of U.K. research and strategy at JLL said in an emailed statement. "There is likely to be a bounce in activity in leasing and investment markets as investor and business confidence return."

The election result provided "some light at the end of the Brexit tunnel" and is "the tonic the real estate market’s been waiting for," said Guy Harrington, CEO of property lender Glenhawk. "Expect improved liquidity, greater transaction volumes, a stronger pound and a bounce in the housing market, all of which will benefit lenders, investors and developers alike."

Still, any bounce in investment may only be temporary, said Neale. The Conservative election campaign was almost silent on the next stage of Brexit negotiations, which will resolve the U.K.'s future trading relationship with the EU, he said. "It is important to emphasize that the longer-term direction of travel is still unclear," Neale added.

The U.K.'s regions could be among the beneficiaries of the strong Conservative majority granted to Johnson, depending on how he chooses to use it in determining the country's direction, according to Neale. A more "one nation" style of government, in line with his tenure as London mayor, could help the regions significantly, he said. "This is likely to manifest itself in greater investment in public services, particularly regional transport, which could lead to significant benefits for the property and regeneration sector outside London."

Walter Boettcher, chief economist at global real estate services and investment management company Colliers International, also encouraged the government to invest beyond London and the Southeast. "Hopefully, the new government will find the time and resolve to begin to push forward a long-delayed agenda for national economic renewal and the long-awaited push on infrastructure and regional development," he said.

The share prices of the U.K.'s largest listed real estate investment trusts responded positively to the election news. The U.K.'s largest listed REIT, SEGRO PLC, jumped 3.2% from its closing price Dec. 12. London office REIT British Land Co. PLC saw its share price jump by 7.3% from its Dec. 12 closing price.

Still, equity investors in London office REITs should not expect a sustained rally, according to Tim Leckie, real estate equity analyst at JP Morgan Cazenove. "It's likely we see a short lived final upside move in London REIT names. However, we reiterate our view that the current share prices of London office-facing REITs have overshot, and risks remain to the downside for rents and capital values. The market will return to fundamentals as it looks ahead for its next catalyst."

Among the generally positive sentiment toward the election result from the real estate sector, a word of warning was issued about the country's battle against climate change under the new government. Of the various party manifestos, the Conservatives were the "least ambitious" on tackling climate change, with a target of net zero carbon by 2050 and no firm commitment on many decarbonization issues, according to Guy Grainger, CEO for Europe, Middle East and Africa at real estate services firm JLL. "40% of carbon emissions come from the built environment, so the real estate industry needs to take responsibility in fighting the climate crisis."