Real Estate today and future CI opportunities

Published 30 Sep 2016

By Philip Hendy

This summer, despite the view of the property profession being remain, ‘Brexit’ become a reality. The following weeks felt post-apocalyptic with resignations, plunging markets, and dire predictions for the UK economy and property but with Article 50 not activated perhaps the real challenges lie ahead for UK real estate.

Following the London 2012 Olympics debate on Europe leading City ended with London collecting the gold medal.  As another Olympics closes, the City’s position is under pressure in a post-Brexit world.  The potential of financial services businesses relocating to the EU, creates concerns over both capital values and rental growth.  Each property asset class is affected by concerns about the UK’s economic growth and the inherent impact on rents and prices.

The gating of six open-ended real estate funds received significant publicity and regulators will consider protection for investors who require immediate liquidity from funds that hold illiquid property. Those funds that sold did not realise book value and the sentiment is values have fallen.  Some gated funds recognised sentiment and marked down the value of assets, which may have added to the pressure.

Now we wait to gauge the impact on the Channel Islands of the UK negotiations and exit from the EU.  In March SDLT relief was given to certain UK structures, whilst unexpected changes to the tax treaties between the Channel Islands and the UK mean offshore developers of UK real estate will be taxed.  As a result, development companies have been redomiciling or becoming UK tax resident.  Hopefully, this is an anomaly rather than the inception of wholescale changes to the taxing of commercial property.  Post Brexit it is a brave Government that adds to the reasons not to invest into the UK.

While the OECD Base Erosion and Profit-Shifting Initiative will affect structures that use debt to increase investor returns, the maximum 30% rate of interest over Earnings Before Interest, Taxes, Depreciation and Amortization creating a challenge for highly geared vehicles particularly if rental levels come under pressure which will be compounded if interest rates rise.

Guernsey and Jersey received positive news in July on AIFMD passporting into the EU meaning the Islands will be able to market funds into the EU, a leap ahead of the UK and potentially a shift of the funds industry in our direction.

Immediately post Brexit, the devaluation of Sterling means UK real estate is cheaper for overseas investors, to whom Channel Island structures are beneficial.  It remains to be seen if this attraction continues or if traditional transaction fundamentals prevail, putting pressure on capital values, particularly if rental growth looks limited.

Many international investors have concerns about the UK’s recent push for public transparency on ownership for indigenous companies and real estate.  The Channel Islands will remain attractive with their offering of public privacy balanced out by strong regulatory transparency.

Time brings new challenges and now the World’s attention is diverted from Brexit.  The new focus is the US election, and we may see a flight of capital with the Channel Islands well positioned to benefit.