Will Private Equity Firms Bet Big on the Post-Brexit Real Estate MarketDigital Manager
It was announced earlier this week that Apollo Global Management (“Apollo”) quadrupled its European real estate lending to $3.7bn in 2019 up from circa $1bn the previous year with plans further to expand its lending in 2020. Apollo is not alone in their increased activity in the real estate sector (and more specifically the real estate debt business) with LaSalle Investment Management expecting to invest a further £1bn in UK property this year, on top of their current £12.3bn real estate assets.
This move is part of the wider trend of private equity (“PE”) investment in UK real estate. Research from Knight Frank in their London Report 2020 seems to confirm this, where they state that capital targeting London commercial real estate is likely to increase by 21% to £48.4bn in 2020. But, what has driven this increased investment?
Since the General Election in December established greater political clarity over Brexit there has been an “unlocking of transactions”, according to the Head of European Commercial Real Estate Debt at Apollo, Ben Eppley in City A.M. Whereby investors and developers alike are now more willing to put capital into future real estate projects. The renewed clarity has been reflected in positive results for the UK construction industry, with The Times reporting that the purchasing managers’ index rose to 48.4 in January, which was above analysts’ forecasts.
Wider macroeconomic trends also continue to play a role in the level of PE investment, with cheap debt coupled with low fixed income returns incentivising investment in real estate. Notwithstanding the Bank of England’s recent decision to keep interest rates at 0.75%. This in conjunction with similarly low rates in the US and EU and the large quantitative easing programmes carried out by the Federal Reserve and the European Central Bank has meant that there is a glut of cheap debt on the markets.
The current monetary environment has had a tranquilising effect on the fixed income market, where real returns are, at best, low and at worst negative. Together, these factors mean that PE firms have already and will continue to look for higher returns, through the real estate market.
The CBRE has predicted that total returns, in the real estate sector, will average 3.1% p.a. from 2020-2024, which is a considerably more attractive return on investment than many alternatives. PE firms, global and UK, will want take advantage of these returns, with Cushman and Wakefield anticipating that non-central business district offices, retail warehouses and shopping centres are likely to see the largest influx of PE capital. 2020 could prove to be an exciting year for real estate and this will only be enhanced by the increasing interest that PE firms are paying to the sector.