Short on London, long on Europe was the traders’ cry after the referendum – but things didn’t quite work out as expected
Three years on from the referendum, we still cannot fully apprehend the effect of Brexit on the European real estate markets. That is not to say there hasn’t been an impact. Any Canadian would tell you that the ultimately unsuccessful Quebexit was the making of Toronto, at the cost of Montreal: the companies that left never came back.
On the morning of Friday 24 June 2016, it all seemed straightforward: go short on London offices and go long on European offices. Thousands of jobs would move to Europe at the cost of London. British REITs tanked, while European ones held relatively firm. However, with the public market having priced down London offices significantly, the private market remained relatively resilient. Despite the forced closing of several open-ended retail funds, there was no panic selling, and in fact some prime assets were sold only 5-10% down on pre-referendum valuations. Eventually the gap narrowed through a recovery in REIT prices.
What was behind this? First, the London office market is very international, with overseas investors accounting for up to 80% of volume. For them, London property had just become 15% cheaper. Second, leaving aside the capital markets implications, at the time of the referendum the underlying leasing market fundamentals were very strong. The strong economic performance of the UK before the referendum (which convinced David Cameron to call a referendum) had pushed vacancy rates down to record lows below 4%. Third, most of the pipeline of office development planned to meet this pent-up demand had not yet started construction and could easily be cancelled, while the pipeline projects that did start were almost all pre-let. And when Theresa May lost the 2017 election, Big Tech coincidentally pushed the button on its huge London campus projects, creating demand at the right time to absorb the new deliveries.
As a result, the short leg of the trade did not meet expectations. The long trade did, but probably Brexit was less of a driver than some other factors. In fact, new Brexit-related leasing deals in Europe were modest in number. Improving economic fundamentals and low vacancy rates in Europe too were creating their own dynamic, resulting in Brexit-related moves being no more than the icing on the cake for European cities.
But it wasn’t all about banking jobs. In the 1990s, the financial sector accounted for 30-35% of take-up in the City, but this had halved to 15-17% at the time of the referendum. Growth had come from somewhere else: the global tech companies. Before the referendum, most investors considered London not only the financial capital of Europe but also its tech capital.
Since Brexit would limit London’s access to young European tech workers, could this strengthen its European rivals? Amsterdam, Berlin, Barcelona
Contrary to popular belief, Tech is physical as well as digital. The internet arrives from the US through huge cross-Atlantic cables, and the natural landing spots are the UK and the Netherlands. The cables landing near Amsterdam connect through the AMS-IX internet exchange (Europe’s largest) to its European hinterland. Germany’s largest internet exchange is in Frankfurt, which shows you the connection to fintech and finance. All this was already in place before the referendum: so while Brexit was not the cause of Amsterdam’s real estate success, it was a catalyst.
From the ashes of the global financial crisis, which hit Dutch real estate much harder due to an oversupply issue, the Dutch had already created the foundation for a more resilient real estate market based on active co-operation between the public and private sectors. The result was a holistic approach to development, rising above local rivalries, and an active role for the government in planning, protecting the public space from mono-style overdevelopment – Amsterdam will not grant development permits unless 70% of a scheme is pre-let. In return, the government has centralised decision-making and simplified the rules. For instance, the Randstad conglomeration, while comprising over 80 municipalities, is now governed by just two entities, the authorities of Amsterdam-Metro and of Rotterdam-The Hague. And this is the key to its success.
The Randstad is a well-connected metropole of more than 7m inhabitants with a good internal transport infrastructure and a similar sub-market structure to London and Paris. It is now an investable opportunity for large real estate capital. Utrecht, for example, is a natural overflow location from Amsterdam – just as Shoreditch is to London and Brooklyn to Manhattan. Already home to 69,000 students, it is building homes for 70,000 more people west of its Centraal station, which is only 15 minutes by train away from Amsterdam’s South Axis central business district, which is six minutes away from Schiphol, while Rotterdam can be reached from Schiphol in 22 minutes. If managed holistically, the real estate potential is there – and, thanks to Brexit, the Dutch have found willing listeners throughout the world.
With hindsight, what can we learn? Maybe that political noise unless followed up by actual business decisions does not influence illiquid asset pricing (despite volatility in their more liquid listed equivalents). Brexit so far has meant lost growth for London and a catalyst for growth in Europe. Going forward, Londoners are bracing themselves for significant economic damage from a potential further escalation into a hard Brexit. And while the Amsterdammers face the same, albeit lesser, downside risk, like the Torontonians they will not be looking back.
