UK, EU still a beacon of commercial property opportunities with end of pandemic in sight

The UK’s vaccination programme is well under way and expected to be completed in the summer, allowing the economy to open to significant pent-up demand
A massive injection of liquidity into the economy by the EU and by national governments to tackle the pandemic’s economic fallout has helped underpin asset values and confidence

Keith Breslauer

Published: 12:00pm, 20 Apr 2021

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With lockdown restrictions to tackle the Covid-19 pandemic still in place across most of Europe, the continent might seem a surprising commercial real estate investment destination for Hong Kong investors.

Yet, one of the largest deals to take place in 2020 was the purchase of the Cabot, a prestigious office complex in Canary Wharf, London, by Hong Kong’s Link Reit, for £380m (US$520m).

This sale concluded despite the UK being plunged into its first lockdown. So, why are Hong Kong investors attracted to European, particularly UK, property assets?

Due to the sharp contraction of the EU and UK economies arising from lockdowns to tackle the pandemic, the acceleration of the decline of bricks-and-mortar retail, and uncertainty about the role and requirements of office space as well-known banks present contrasting views on remote working, investing in real estate assets might seem counterintuitive. However, beneath this picture there are opportunities for investors.

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The massive injection of liquidity into the economy by the EU and by national governments to tackle the pandemic’s economic fallout has helped underpin asset values and confidence. This has enabled a low-interest rate environment to continue, making investment in real estate-based assets attractive.

Concerning the economy, recovery is in sight with the UK’s vaccination programme well under way and expected to be completed in the summer, allowing the economy to open to significant pent-up demand.

Similarly, in the EU, vaccination is gradually gaining momentum after setbacks and its economy is expected to be fully opened towards the end of this year. Whether you’re looking at the UK or the EU, the rebound is likely to be dramatic.

According to Capital Economics, considerable household savings have been accumulated during the pandemic, equivalent to €360 billion in the Eurozone and expected to reach £250 billion by the end of June in the UK.

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The Organisation for Economic Cooperation and Development (OECD) concurs with this positive outlook, revising up its GDP growth forecasts for 2021 to 5.1 per cent for the UK, with its economy first out of the blocks in Europe, with the EU’s economy trailing at a far from shabby 3.9 per cent.

Institutional investors share this optimism. According to an annual survey of investment intentions by investor associations INREV, IREV and PREA, there is appetite to invest €55.4bn in global real estate during 2021, with close to half, €26.5bn, allocated to European property assets. Furthermore, for many, the pandemic has created opportunities, with many preferring value-add and opportunistic strategies in the current market.

Due to a combination of the fallout from Brexit and the pandemic, the UK is particularly seen as good value by Asian investors. This is especially true for London, which retains its status as a major global financial hub with real estate that is considered a store of wealth.

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For example, Hong Kong investor K&K holdings bought a prime piece of central London commercial real estate, Corinthian House, towards the end of last year for well below its asking price after the owner, the retailer Arcadia, went into administration.

Although the predicted low-interest rate environment over the coming decade will help fuel investor appetite for real estate assets, be in no doubt of the pandemic’s profound changes to the market in Europe. Online shopping’s rise means few will consider retail opportunities, while too many have ploughed into logistics to make it appealing from a returns point of view.

There will be an impact on offices as firms increasingly adopt a flexible mode of working, while the post-pandemic picture for the hospitality and leisure sectors is mixed; many predict that there is significant pent-up demand, but virtual meetings may well undermine business travel, and the reopening of the economy might be too late for some.

Crucial to creating value is understanding how these changes play out is taking a granular approach to each market, sector and deal. The biting point will be found where assets can offer value beyond their previous use owing to their location and the demand for a type of space in that market, and having the vision and asset management skills to drive this forward into an income-producing asset.

Investment in Europe’s commercial real estate sector is full of opportunities. However, it will take considerable expertise and local knowledge to discern the shift in trends and answer the questions created by the pandemic to exploit them effectively. And for those who do, the rewards will be compelling.

Keith Breslauer is the managing director of London-based private equity real estate fund Patron Capital