Rasmala Newsletter – Brexit: what’s next for the real estate sector

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We are pleased to present to you our second investment 2017 newsletter. In this issue, we give our views on the GCC Fixed Income markets and the impact of Brexit on GCC investors’ appetite for UK real estate. We also focus on key strategies for investors across regional fixed income.

What are your view on current status of Brexit?

Babar Mufti
Head of Treasury

Brexit is a landmark process taking place now and is arguably one of the larger transformational events of our time concerning UK and Europe. The British people voted in June 2016 to leave the European Union, for reasons that are rooted in their desire for greater control over key issues such as immigration, regulation, funding and sovereignty. Time will tell whether these aspirations are achieved and at what cost, but it’s clear that there is much work ahead. Since the referendum, Brexit’s direction  has been uncertain, chaotic and highly politicized. However, with Article 50 having been invoked it starts the formal exit discussions with EU leaders.

What is the impact of UK Parliament’s approval to invoke the EU treaty’s Article 50 exit clause?

The impact on the UK’s economy from Brexit thus far has been mixed. On one hand, the GB Pound has weakened by approximately 17% since pre-Brexit levels, which highlights a new economic reality for the UK and the risks associated with leaving the EU. On the other hand, undeniable positives are visible in UK’s economic performance – the economy withstood the initial period of uncertainty post-referendum
and since then UK’s booming stock market and positive economic indicators suggest a strength in the economy. While the picture is still fluid, the economy’s resilience thus far contrasts
sharply with the doomsday scenarios we saw associated with Brexit.

UK must now negotiate with EU leaders the terms of its exit from EU and the Customs Union. There are numerous thorny issues which make negotiations inherently difficult – such as UK’s substantial trade links to the single market, disagreements on subsidy payments and fees, uncertainty about fate of UK and European citizens, euro clearing in London and impact to UK’s financial and services sectors. In addition, government must also address other fronts with urgency – key amongst these is to establish trade agreements with the rest of the world and develop new tariffs structures. Other difficulties for the UK government include a possible referendum by Scotland to exit from the UK. The challenges are major, and the path ahead and outcomes are far from certain.

Harris Irfan

Managing Director

Head of Investment Banking 

Have transaction volumes increased or decreased? What were the key drivers?

Transaction volumes reduced considerably in the second half of 2016, especially in the immediate aftermath of the June referendum. However, by the start of 2017, there was a noticeable increase in enquiries from investors in the GCC, much of this driven by an increasing level of stability in the value of sterling versus dollar. Interest remains high in income-producing commercial office space and logistics facilities in London (Central, West End and the City), and the leading regional cities.

One year on, are GCC investors in a better or worse position to invest in real estate in the UK?

Whilst GCC investors are showing increasing confidence in the level that sterling seems to be settling at, there are fewer assets of the appropriate quality available on the market and therefore competition for such assets remains strong. The net result is prices are either similar   to pre-June referendum levels or marginally higher.

Are there any new challenges and opportunities to consider when making investment decisions?

Openly marketed opportunities in the real estate market remain thin, and we are seeing far less supply than we have seen in previous years. During 2017, the challenge will be to identify and originate opportunities that we would consider investing and proposing to our client base. Post Brexit, existing owners have revised their strategies, and we are seeing a more conservative approach to capital recycling as owners sit back and take a ‘wait and see’ approach. The large investment and pension funds have also
slowed their investments in 2017, until the nature of Britain’s exit from the EU is determined. At Rasmala, we continue to originate opportunities through our alternative channels and will only consider opportunities where we believe the strength of the covenant is strong, with a long unexpired lease in locations where the fundamentals are strong for reletting in the event a tenant were to leave.

We will remain focused on our investment strategy looking at commercial office spaces and logistics/ warehouse assets where we believe the asset is key to the operation of the tenant. We will remain cautious and further attention will be given to the activity that the client performs in the building, and the investment that they have made into the asset. 2017 will be a year in which we believe quality product will remain attractive to international investors, especially those from Asia and the Middle East, and we expect the market for such assets to be actively contested.  We believe that distressed opportunities may arise in the higher end residential sector and we are already seeing discounted pricing in GBP2m plus category in certain locations.

Naseer Aka  

Head of Real Estate

Which classes of real estate assets are the most attractive and why?

Rasmala will continue to focus on its core strategy during 2017 and we will continue to look for commercial office spaces let to strong tenants, with long leases in good strategic locations. In the warehouse sector, we believe that traditional retailers will continue to have a difficult time with high street presence, and that retailers who have invested and repositioned their business to an online platform will have a better opportunity to sustain the shift in consumer shopping habits. The warehousing sector has seen considerable investment over the last decade, yet there continues to be a shortage of quality product on the market, both for occupiers and investors.

How does Rasmala intend to navigate market volatility and capitalise on potential investment opportunities?

Rasmala has a ground presence in the UK, regulated by the FCA in addition to its DFSA licence in the UAE. Our comprehensive network of brokers, banks, funds, lawyers, administrators and other industry stakeholders affords us market leading access to the highest quality assets. Our due diligence, structuring and execution process is robust and of the highest calibre, drawing on the world-class experience of the team and senior management. We continue to emphasise asset location, credit quality of the tenant, lease length, covenant strength, and certainty of income as key drivers of the assets we source for our clients.

 

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