In a 3 pct world

Rafał Ostrowski, ‘Eurobuild CEE’: You’ve come here from London, so before we move on to CEE affairs I’m tempted to ask you what your take on the UK property market is one year after the EU referendum.

Chris Bell, managing director, Europe, Knight Frank: In the first three months after the Brexit vote in June last year it was like: help! what’s going to happen?? Incredibly, however, from September and October onwards the British economy actually picked up. It was as if the British people had said: we are going to get on with it. So, we have had a very good year, which has surprised everybody. I couldn’t tell you why this has happened, because it defies logic, but it is the case and perhaps one shouldn’t think about it too much.

So why is there uncertainty again if the numbers are so good?

As this new reality really begins to dawn on us – and as it gets discussed in the media and the initial discussions get going with the EU negotiation team, which is likely to be very tough with us – it is becoming increasingly clear that nobody knows what is going to happen. If you add that to the bad election result for the government in May this year, then you are left with a lot of uncertainty and people are beginning to get more concerned. Of course, business doesn’t like uncertainty – we don’t mind things going up or down, because we can plan for this. We just don’t know what is going on now, frankly. The messages that are now coming out are very mixed.

And how is it for the capital market?

It has been fascinating. In London the majority of buyers are foreign and 80 pct of the purchases are foreign. You would have thought that the knee-jerk reaction would be: everyone is going to leave London, so we will leave London, because they are leaving... The volumes, however, are still very good. The biggest problem is not the money looking to invest or the demand, it’s the supply. People aren’t selling.

In which sectors?

In London, it’s particularly offices, especially in the context of Brexit. But this also applies to other sectors. The problem is, what do we do with our money? Funds are mandated to invest and they are having problems doing that. There is little point in reinvesting it at current pricing levels, because the returns will be under pressure, so the big problem is one of available stock. The office market is still hot, but there is the view that it is beginning to soften, so 3.5 pct is moving towards 4 pct, but we are not talking about anything overly dramatic.

What about the industrial market?

The industrial market outside London remains completely unaffected by any form of Brexit or European discussion, but what we are getting in the UK and obviously in America, and this is inevitably going to cross over to Europe, is the rise of ‘same-day’ delivery. In one word: Amazon. Retail is now turning into logistics. Open many British newspapers and you’ll see adverts saying things like: if you buy before 10am, you’ll get your jacket or your shoes before 10pm that day. That has been driving the logistics market phenomenally, which is probably the hottest sector right now. Logistics yields are dropping below 5 pct. There has been this big scramble due to the changes in shopping culture, which I think inevitably will spread across Europe too. This is also having a major impact on retail.

How is it changing retail?

The consequences for retail depend on whether it’s prime or not. Secondary retail is having a very, very difficult time and people in this sector are becoming increasingly concerned. Why would you go to an average shopping centre, when you can just pick up your iphone and order online? You either have retail that is all about the experience – a day out for the family – or you go online. In turn secondary retail is getting hurt. The rise of online ordering has become a massive thing. This means that the flow of money into the UK, irrespective of Brexit, is still very, very strong. That’s just a fact.

Who is investing?

It’s new money. The Chinese are very active at the moment. If you are selling a London property for USD 50 mln plus, China will be responsible for 70 pct of the phone calls you’re likely to get. They like London, especially since the pound now looks very cheap against the dollar and the euro. Statistics show that London is 80 pct foreign money, which is phenomenal.

Are we likely to see these new investors in Poland soon?

New players coming into the markets, like the Chinese or the Koreans, generally start in London, but they have been moving out from London into France and increasingly to Germany and Spain. We believe they will inevitably head towards Central Europe and particularly Poland, for two reasons. One is the differentiation on yields, that is, between values, which is now higher. Typically, when you talk about prime yields, in London and Paris you are talking about 3.5 pct, but in Poland you are talking 5.25–5.5 pct. That is attractive in itself, but you also need to have the other things in place, such as having a great workforce, educated people or a strong economy. Poland is positioning itself quite cleverly as an outsourcing location. The country remains attractive in that regard and we generally see Poland and the Czech Republic as the next phase of new capital coming in. At the moment, you can see that Chinese capital is looking but not buying. We have seen Chinese capital poised to make such a move but for whatever reason not quite going through with it. However, it will happen for sure.

The Polish government has been coming into conflict with the European Commission over a number of issues, such as the refugee quota system and changes to the Polish judicial system. Do you feel this is now having an impact on the capital market here?

Only on the margins. And it’s only really beer talk and gossip. Money is not terribly sentimental. The facts are that investment volumes are going up every year and that over 90 pct of the investment is foreign capital, new people are coming into the market. I think this is an interesting media discussion to have, especially when you have 24 hours of news print to fill, but I actually think money has little sentiment. Money looks for returns. We are not talking about Turkey, North Korea or Russia here. We are talking about a country of 40 mln people in the European Union. So I think it is having a negligible impact.

When will this cycle finish?

We’ve been asking when will the cycle finish for the last two years or so… and I think the real question is: why would the cycle finish? There’s a lot of equity, and unlike last time in 2008, that money is not heavily geared. The banks are being pretty sensible, so the real question is – why wouldn’t it continue? That’s the question I would ask, with all this capital that is being printed and is available – and goodness me, there is a huge amount of it – that can’t find a home. If you put it in the bank, you would have ‘no’ return on it. In Germany you get a minus percentage, so you are being encouraged to invest it. Traditionally, if something goes wrong, it has been the banks’ fault, but at the moment – and I may regret what I am about to say, because they always surprise us – there is no indication that the banks are being reckless with their lending. As it is, if you are looking for speculative finance for development, you need to put down 30 to 40 pct of the capital before you get it. Lessons have been learnt, lenders remain cautious, and there is no obvious – and I should be careful about saying this – reason why things should go wrong, unless something geopolitical happens.

How’s this rosy situation affecting yields?

We are in a brave new world now, where we talk about yields of 3 pct as though this is normal. It’s not normal. Why is 3 pct in property acceptable? Because, as you can hear from our guys here, you can get bank loans in euros at 1.5–2 pct. Bond yields are negligible. Interest rates are negligible. The stock markets tend to get jittery when the world is a little uncertain, such as what Mr Putin and Mr Erdoğan might do and what we’ve got in North Korea... Property, on the other hand, is a tangible asset, as people learnt in 2008. It’s good to have.

30 years with Knight Frank

Chris Bell has been the managing director of Knight Frank Europe since June 1999, having previously been the managing director of Knight Frank España between 1991 and 1994 and heading the national offices development team in London. He joined the City office of Knight Frank in 1988. His background is in investment and development, with clients including Standard Life Investments (SLI), Goodman, the London Development Agency (LDA), Axa REIM, RREEF and Warner Bros.