Real Estate

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

Real estate has been the obvious sell in the wake of Britain's vote to leave the European Union.

Publicly traded real estate developers are trading at a steep discount to value of their portfolios, reflecting fears of a downturn in office demand, while commercial property funds are rushing to sell assets. Even London home builders are offering would-be buyers free furniture or parking spaces to seal deals.

Easy Sell
Shares of real-estate investment trusts (REITs) have underperformed since the U.K. vote to leave the EU
Source: Bloomberg

But behind all this lurks some good news. Evidence of a meltdown in valuations and investor demand just isn't there yet. For a market said to be in the eye of the hurricane, the prices and deals being struck actually look reassuring.

Aberdeen Asset Management this week sold a building on Oxford Street, the U.K.'s busiest shopping thoroughfare, after cutting the asking price by 15 percent. At first glance, that reduction looks painful.

But this is an asset sold by one of several property funds that had to freeze redemptions after investors rushed for the exits earlier this month. For a building sold in a matter of weeks in the middle of a liquidity crunch, it's not a bad result.

And for other companies that aren't under that kind of pressure, such as British Land, the terms being struck on property deals have barely budged since the referendum. British Land this month sold a department store -- again on Oxford Street -- at a yield of about 2.75 percent, in line with pre-Brexit-vote yields, as my Bloomberg News colleague Jack Sidders points out.

The ARM Effect
The pound's drop has made U.K. assets look attractive to foreign buyers
Source: Bloomberg

To understand why, it helps to look at who's buying as well as the asset that's being put up for sale. The buyers in both cases -- Norway's sovereign wealth fund and H&M magnate Stefan Persson -- came from overseas and no doubt sniffed a bargain given the pound's slide following the referendum vote. This is the same kind of logic that helped lead Softbank of Japan to acquire ARM, a British chip designer.

There's also a London "prime" effect. Oxford Street is in the heart of the capital and is seen as one of the country's safest investment spots for property. In a world where negative interest rates are increasingly common, it's not too surprising to see global investors seeking safe havens in property that will yield even 2.75 percent.

Prime London
Offices in the capital only account for a small proportion of the suspended funds' holdings
Source: Morgan Stanley

Two sales won't dispel concerns the wider British real estate market is heading for a steep fall. London, it can be argued, is uniquely attractive to overseas buyers in a way that regional cities like Birmingham or Newcastle simply aren't. That's a problem for the funds that suspended withdrawals because office space in the capital only accounts for a small part of their holdings.

And there remains the nagging threat that Brexit will push tenants in the financial and related industries out of London, making what is supposed to be a safe haven anything but that.

Nevertheless, it does show that the twin support of currency and low interest rates have clearly helped the market absorb the short-term pain.

There will be more hurdles in future. Morgan Stanley analysts expect London office rents to fall 15 percent over the next 18 months. Given the sector's indebtedness and the potential for prices to drop further, REITs' current 30 percent discount to their net asset value may not narrow too much.

Compared, though, with the market's worst fears, the July hurdle looks to have been cleared.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net