I OVERVIEW OF THE MARKET
2014 and 2015 were record-breaking years for real estate M&A in the United Kingdom and saw over £128 billion-worth of completed transactions.2 The past few years have been marked by a large number of deals in the hotels, leisure and specialist property industries, and investment volumes have been boosted by a number of large portfolio deals, highlighted below, with only a small number of single asset transactions exceeding £300 million.
The increase in portfolio transactions has largely been driven by overseas investors who have continued to demand larger lot sizes. That demand accounted for around half of all acquisitions by deal value in 2015 and also led to an increase in competitive tenders and auction processes. Interestingly, large portfolio acquisitions have not been confined to central London; there has been a much greater diversification and geographical spread in the stock purchased by foreign investors over the past two to three years.
Given the fluctuation and uncertainty in the equities and bonds markets over the past year, real estate has also been considered an attractive and safe asset for many investors. Indeed, returns have outstripped those from equities and bonds, led by the office and industrial sectors (currently in a stronger position than retail), which have seen increased demand and undersupply. While retail development has been limited, there have been pockets of high demand, particularly in London.
The availability of cheap debt finance also continued to increase during the 2014 and 2015 period, with both banks and other financial institutions targeting opportunities to lend across a wide range of sectors. There has been a healthy appetite for, and a higher level of, new loan originations in more secure areas of the market and senior debt and mezzanine finance markets continue to be competitive. Insurers have also stepped into the real estate debt market in larger numbers, increasing pressure on, and competition against, the traditional banks. Consequently, some lenders have also increased their risk appetite, considering lending on secondary assets in prime regional locations (though the availability of development finance has remained limited).
The first half of 2016 has seen a marked slowdown, with activity and deal flow levels dropping in the run-up to the United Kingdom’s referendum on its membership of the EU.3 The vote to leave has disrupted the markets and left many sectors in a state of uncertainty and instability. While activity has by no means ceased, there is a question as to how the real estate sector will behave for the remainder of 2016 and beyond.
II RECENT MARKET ACTIVITY
i M&A transactions
Some of the most significant real estate M&A transactions of the past few years are summarised below.
Digital Realty Trust’s acquisition of eight data centres
In May 2016, Digital Realty Trust Inc, the US-based REIT, announced that it had entered into an agreement to acquire a portfolio of eight data centres (in London, Amsterdam and Frankfurt) from Equinix Inc, another US-based REIT, for approximately $874.4 million.
The sale by Equinix was a condition of the clearance from the European Commission for Equinix’s acquisition in January 2016 of TelecityGroup plc, the European data centre provider, for $3.8 billion. The acquisition, which disrupted an existing merger between TelecityGroup and Interxion and secured Equinix’s position as the top data centre provider in Europe, gave rise to substantive antitrust overlaps and resulted in commitments being given to the European Commission to divest the eight data centres.
As part of the transaction, Digital Realty granted Equinix a binding option to acquire its operating business, including its facility in Paris. Digital Realty saw the deal as an opportunity to enhance its global presence and increase the scale of its European data centre operations.
London & Regional’s acquisition of the Atlas Hotels Group
In April 2016, London & Regional, the UK-based property company, acquired Atlas Hotels Group Limited, the UK-based hotel operator, from Lone Star Funds, the US-based private equity firm, for £575 million.
The transaction included 46 Holiday Inn Express hotels and a Hampton by Hilton and was London & Regional’s first venture into the budget sector. The portfolio comprised 5,575 rooms, 15 per cent of which were located in London.
Greystar Student Living’s purchase of the Nido student accommodation portfolio
In April 2015, Greystar Real Estate Partners (through its subsidiary Greystar Student Living) acquired three student accommodation properties from Nido London, a UK-based student accommodation company, managed by Round Hill Capital, for £600 million.
The portfolio comprised 2,375 beds, spread across three London locations. Greystar saw scope for significant value given the recent growth in the student accommodation industry.
Intu Properties’ acquisition of three Westfield Group retail sites
In May 2014, Intu Properties plc, a UK-based retail developer, acquired the Merry Hill, Derby and Sprucefield shopping centres of the Westfield Group, the Australian retail property group, for £863 million.
Intu acquired 50 per cent of Merry Hill, 100 per cent of Derby and 100 per cent of Sprucefield and financed the transaction by way of new debt facilities (totalling £423.8 million) along with a fully underwritten rights issue (raising approximately £488 million).
A number of REIT and commercial real estate companies have also listed on the London Stock Exchange in recent years. Some examples are detailed below:
- a Schroder European Real Estate Investment Trust plc (a REIT investing in commercial real estate in Europe – listed 9 December 2015): market capitalisation on admission – £107.5 million; size of the offer – £107.5 million.
- b AEW UK REIT plc (a REIT investing predominantly in a portfolio of smaller commercial properties in the United Kingdom – listed 12 May 2015): market capitalisation on admission – £100.5 million; size of the offer – £98.5 million.
- c Kennedy Wilson Europe Real Estate plc (a company investing in real estate across the United Kingdom, Ireland, Spain and Italy – listed 28 February 2014): market capitalisation on admission – £910 million; size of the offer – £819 million.
ii Private equity transactions
Private equity is also active in the real estate market in the United Kingdom and in recent years, private equity firms have raised significant funds with relative ease. Some of the major private equity real estate M&A transactions over the past few years are summarised below.
Lone Star’s acquisition of MRH (GB) Limited
In January 2016, Lone Star Funds, the US-based private firm, acquired MRH (GB) Limited, a UK owner and operator of petrol filling stations, from Equistone Partners Europe Limited, the UK-based private equity firm, and Susan Tobell and Graham Peacock (private individuals) for £1 billion.
The acquisition included 450 petrol stations (mostly branded BP and Esso) and was particularly attractive to Lone Star given MRH had reported revenues of £1.79 billion for the year ended September 2014.
Brookfield’s acquisition of Center Parcs UK
In September 2015, Brookfield Property Partners (a subsidiary of Brookfield Asset Management) acquired Center Parcs UK from Blackstone Capital Partners V (a fund managed by the Blackstone Group) for £2.4 billion.
The assets included Center Parcs’ five UK holiday parks (which employ around 7,500 people). The transaction was attractive to Brookfield given the target’s steady cash flow generation and average occupancy rates of approximately 97 per cent.
Lone Star’s purchase of a Jurys Inn hotel portfolio
In March 2015, Lone Star Funds acquired a chain of 31 Jurys Inn hotels from a group of investors, including the Oman Investment Fund, Mount Kellett Capital Management, Ulster Bank, Westmont Hospitality Group and Avestus Capital Partners, for £680 million.
The assets included 7,000 rooms across 31 cities (21 provincial UK hotels, four London hotels, five hotels in Ireland and one in Prague). Lone Star saw the potential for future growth of the business and seized the opportunity to further capitalise in the hotel sector.
Blackstone’s acquisition of a portfolio of 16 warehouse properties
In April 2015, Blackstone Real Estate Partners Europe IV acquired 16 UK warehouse properties for its European logistics company, Logicor, from a joint venture between Oaktree Capital Management and Anglesea Capital, for £381 million.
The properties were located in core logistics markets across the United Kingdom and were leased to a diverse range of tenants (including Arcadia, B&Q, Co-Operative Group, Debenhams and Unipart). The transaction substantially increased Logicor’s UK portfolio and enhanced its relationships with important customers, strengthening its position in the sector.
Private equity takeovers
In addition to the above private equity M&A transactions, there have also been a number of recent takeovers and mandatory offers by private equity firms in the United Kingdom.
- a Brookfield and Qatar Investment Authority (2015) made a mandatory offer, through their joint vehicle Stork Holdco, to acquire a 30.63 per cent stake in Canary Wharf Group plc (CWGP) at an offer price of £6.45 per share, valuing the transaction at £1.26 billion.4
- b Lone Star Funds (2015) made a voluntary recommended offer to acquire the shares in Quintain Estates & Development plc, the UK-based real estate company, at an offer price of £1.41 per share, valuing the transaction at around £745 million.
III REAL ESTATE COMPANIES AND FIRMS
The UK REIT regime came into force in January 2007. It exempts from corporation tax the income and capital gains of a UK REIT’s property rental business. The income and capital gains of any other business, including acquiring or developing property for sale, is taxed at the main corporation tax rate.5 While not all property companies are REITs by any means, the largest corporate real estate groups are structured as REITs in order to benefit from these tax advantages. As a result, M&A involving UK REITs will have specific considerations that will need to be taken into account.
A UK REIT can consist of either a single company or a group of companies. The basic conditions that must be met by the company, or parent company of a group, are as follows:
- a it must be resident in the United Kingdom for tax purposes;
- b it can have only one class of ordinary shares, which must be listed or admitted to trading on a recognised stock exchange;6
- c it must not be a ‘close company’ (a company that is controlled by five or fewer shareholders); and
- d the property rental business must constitute at least 75 per cent of the total profits and assets of the company or the group.
There are also diversification rules requiring the business to hold at least three properties, each representing no more than 40 per cent of the total value of the portfolio.
In order to ensure that the property income generated by the property rental business is ultimately taxed, at least 90 per cent of the income profits of the business must be distributed annually by way of dividends. A UK REIT is subject to a tax charge to the extent that it falls short of this.
A leverage requirement is also imposed such that the gross income of the UK property rental business must cover the external financing costs of the entire property rental business by a ratio of at least 1.25:1. Again, a tax charge is imposed on the UK REIT to the extent of any excess financing cost.
Takeover of a UK REIT
If a UK REIT, whether a single company or a group, becomes part of another REIT, it will remain within the UK REIT regime as long as the conditions continue to be met. A takeover may well cause the company (or parent company of a group REIT) to become a ‘close company’ unless the terms of the acquisition are such that at least 35 per cent of the ordinary shares remain in public hands. However, UK and foreign REITs are now recognised as ‘institutional investors’, which should deal with that point in most cases. In a cross-border context, the impact of the leverage requirement – in that it looks at gross income of the UK property rental business only but takes into account the external financing costs of the worldwide property rental business – will need to be considered.
The introduction of UK REITs in 2007 coincided with the beginning of a major downturn in the commercial real estate market. UK REITs were conceived during a UK property boom and consequently faced challenges during the financial crisis.
However, as property prices have recovered, there has been a renewed interest in UK REITs as a tax-efficient investment structure, especially following HMRC’s abolition of a 2 per cent entry charge on seeding assets in 2012. The UK REIT regime is an improvement to the tax environment for UK real estate companies and has consequently had a positive impact on the UK-listed real estate sector.
The UK REIT sector now includes some of the United Kingdom’s largest real estate companies, such as Land Securities, Derwent London, British Land, SEGRO, Great Portland Estates and Hammerson, and the number of UK REITs has grown significantly in recent years (including externally managed UK REITs) to well over 30.
ii Real estate private equity firms
In the United Kingdom, real estate private equity firms can be structured in a number of ways. As a result of regulatory and tax issues, which affect the operation of a fund and its investors, the most common structure in the United Kingdom is an English (or Scottish) limited partnership. These vehicles have no legal status in their own right; they exist only to allow the partners to act collectively. Each partnership:
- a has a finite life (usually 10 years with a possible two-year extension, although some have investors with rolling annual commitments);
- b has one general partner with unlimited liability for the liabilities of the partnership;
- c has a number of limited partners (LPs) whose liability is limited to the amount of their equity investment in the partnership; and
- d is managed by an investment manager on behalf of all the partners.
The investment manager is a separate entity (owned collectively by the private equity fund managers). It is structured as a partnership (often an offshore limited partnership). The manager receives a fee from each fund it manages.
The general partner is a company owned by the investment manager and, in compliance with the Limited Partnership Act 1907, must have unlimited liability for the liabilities of the private equity fund. However, the individual partners cap their liability by investing through a limited company. Individual partners of the private equity fund manager are required to invest their own money directly in the fund (usually between 1 per cent and 5 per cent of the fund).
External investors are LPs. Their total liability is limited to the amount of capital they have invested. LPs themselves may be structured as corporations, funds or partnerships.
Private equity firms raised large amounts of capital for European real estate between 2013 and 2015. This filtered through to the United Kingdom, with investors attracted by a relatively benevolent tax environment and the lack of legal restrictions imposed on overseas investors holding commercial real estate assets. Investment by firms in real estate in central London alone almost doubled between 2007 and 2013, with investment increasing from £350 million to £636 million.7
As highlighted by the deals outlined above, private equity firms have recently purchased large portions of commercial real estate for the diversification that the assets afford, the protection they offer against inflation and the dual benefits of equity-type performance potential coupled with a bond-type risk profile (due to the steady income from rental receipts and capital growth).8
Private equity firms have targeted various real estate assets in recent years, including:
- a the hotel market, which has seen increased demand from cash-rich investors from Asia, the Middle East and US-based private equity firms;9
- b healthcare, with investment seen in healthcare services, social care services, pharmaceuticals and medical tech;10 and
- c student accommodation, driven by emerging-market wealth – global investment into UK student housing saw over £1.45 billion invested into 29,744 beds in 2014 alone.
The value of assets and land traded during the first five months of 2015 was £4.2 billion and the bulk of that investment activity shifted from UK owner-operators to UK and overseas-based private equity and global institutions.11
i Legal frameworks and deal structures
When investors acquire or dispose of real estate in the United Kingdom, the majority of such deals do not involve the transfer of title to the relevant property from the seller to the buyer. While smaller deals may involve the direct transfer of real estate assets, for a number of reasons (the main driver is often tax, as outlined below), the acquisition or disposal of real estate assets is made through share purchases of corporate vehicles that own the property in question. It is unusual for there to be a direct transfer of real estate.
Various structures are used to acquire and hold real estate. The optimum structure will depend, in each case, on a number of factors and considerations (including funding, tax and exit routes (for private equity funds)). Typical structures include:
- a companies limited by shares: body corporates with a legal personality distinct from those of their shareholders and directors; these companies are governed by the Companies Act 2006;
- b limited partnerships: discussed above in relation to private equity firms;
- c limited liability partnerships (LLPs): bodies corporate with a legal personality distinct from those of their members. Members have limited liability in that they do not need to meet the LLP’s liabilities. They are governed by the Limited Liability Partnerships Act 2000 and the Companies Act 2006;
- d joint ventures: there are no laws relating specifically to joint ventures under English law. Their structure will be determined by the nature and size of the enterprise, the identity and location of the parties and their commercial and financial objectives. The relationship between the parties will be subject, depending on the structure, to general common law rules, the legislative provisions of company and partnership law and the provisions of the JV agreement;
- e trusts of land: any trust that includes land as part of the trust property will be a trust of land. Trustees have a power to sell the property, but no obligation to do so, unless this is made expressly. They are governed by the Trusts of Land and Appointment of Trustees Act 1996; and
- f REITs.
Share acquisitions with cash consideration remain the predominant form of real estate transaction structure. This is likely attributable to the relative simplicity of completing a transaction structured as a share acquisition and, from a valuation perspective, the certainty of receiving cash consideration.
Fixed-price transactions (often in the form of ‘locked boxes’) are the structure of choice for private equity sellers, although they are increasingly used by trade sellers conducting auctions. Earn-outs and deferred consideration are not common features of the UK real estate M&A market.
Post-completion adjustments to the purchase price are also a common feature, particularly where there is a delay between signing and completion (see below). Adjustments are most commonly made to account for variations in working capital and net debt.
The use of escrow structures has also increased in the real estate private equity M&A market as way to make contractual claims in respect of warranties and post-completion purchase price adjustments.12
ii Acquisition agreement terms
As noted, typically real estate assets will change hands through the sale of the shares in a corporate vehicle that owns those assets. As with any share deal, the buyer will take on the target’s existing liabilities and commitments and the seller will provide warranties and certain indemnities. The title to the real estate assets will usually be certified by the vendor’s counsel.
The extent of the sales and purchase agreement (SPA) provisions will vary depending on the nature of the transaction, the real estate assets in question and the due diligence undertaken. However, there are a number of aspects to consider.
A number of conditions may need to be satisfied before a real estate transaction can complete (such as obtaining planning permission, third-party consents, or even practical completion of a property development). Any such conditions must be satisfied or waived before the real estate transaction can complete.13
Splits between signing and completion
For any split between signing, several practical matters should be considered:
- a whether shareholder (or equivalent) approval is required by either of the parties;
- b whether EU merger clearance is required;
- c whether any warranties given at signing need to be repeated at completion;
- d whether rescission is possible between signing and completion;
- e whether any deposit paid at signing should be returned to, or forfeited by, the buyer if the transaction does not complete; and
- f whether management of the underlying properties is required and, if so, whether the buyer will exercise control.
Where there is a split between signing and completion, this may affect whether the buyer is able to negotiate a rescission right, mentioned above, during that time.
Where a seller is required to obtain shareholder approval for a real estate transaction after signing but before completion, it will be difficult for them to argue that during such period the buyer should face the potential risks and be unable to rescind.
In contrast, where the reason for a split is as a result of the time required for the buyer (e.g., to procure debt finance), it is less likely it will be able to negotiate a rescission right for anything other than material breach of any restrictive conduct provisions.
In UK real estate acquisitions, buyer protections are particularly important as the buyer is not afforded any statutory or common law protection on acquisition; caveat emptor (‘buyer beware’) applies. Where the buyer purchases a target group and is to inherit all related obligations, liabilities and commitments, a robust package of warranties and appropriate indemnities will be required from the seller. These will normally be limited to the corporate vehicle and taxation matters; the buyer will usually be expected to satisfy itself on title to the real estate assets through reliance on certificate of title issued by the vendor’s lawyers or through a normal due diligence exercise.
Although sellers (particularly private equity sellers) will not want to provide a large number of warranties on the sale of real estate assets, they are important in order to provide the buyer with some contractual protection. An SPA will not generally include long-form property warranties; the buyer’s property enquiries will be answered by the seller in the form of representations.
Buyers are increasingly succeeding in extending the scope of warranty coverage, although sellers often succeed in disclosing all due diligence information against such warranties. Private equity sellers have also conceded business warranties on occasion (however, these tend to be in respect of identified issues that cannot be addressed through further diligence or otherwise reflected in the price).
The repetition of warranties at completion is usually limited to ‘core’ warranties regarding title to the shares or real estate assets and the capacity and authority of the seller to enter into the transaction.
Where a buyer identifies (through due diligence) a particular risk or liability that it is unwilling to assume (e.g., environmental risks, or planning consents or permissions) and that risk is not easily quantifiable, specific indemnities will be sought, shifting the exposure to the seller. Warranty claims are difficult to make in practice, so indemnities are preferable from the buyer’s perspective. Sometimes title insurance to protect against a specific title defect can be obtained.
The limitations on a seller’s liability under an SPA will be dependent on the particulars of each transaction. In practice, however, the parties will agree that certain warranties (i.e., core warranties) will be capped at the overall consideration for the deal. Depending on commercial and competitive pressures, there may be a different cap on liability for other warranty breaches (e.g., 15 to 20 per cent of the overall consideration).14
General warranties are likely to have a duration of 18 months to two years, while tax warranties are more likely to have a duration of four to six years. There is also likely to be a de minimis threshold that must be reached before a claim is brought.
As noted, the seller’s exposure under the warranties will be limited by the disclosures made in the disclosure letter (which the buyer will ensure are sufficiently detailed so that a view can be taken on its liabilities).
There is a growing tendency for both sellers and buyers to obtain warranty and indemnity insurance in the UK M&A market. Insurers such as Aon and Willis are increasingly marketing their willingness to offer warranty insurance, although they expect that careful due diligence is carried out in the normal way by the buyer. This trend has been driven by sellers seeking a clean exit – a broader set of warranties can be presented with limited post-completion financial exposure. Similarly, buyers are arranging insurance to supplement or cover gaps in the protection provided by sellers – securing sufficient protection can allow buyers to proceed with a transaction without raising a seller’s exposure and potentially prejudicing the competitiveness of any offer.
iii Financing considerations
Real estate investors are usually backed by a mixture of debt and equity. Lenders will require typical security packages in relation to real estate lending, which will consist of:
- a charges by way of legal mortgages over real estate assets;
- b charges over rents receivable;
- c potential charges over bank accounts into which rents are paid; and
- d additional charges over certain contracts (such as leases, insurance policies and development and construction contracts).
Depending on the circumstances, lenders may also seek protection against borrower default through conditions precedent and direct covenants in the facility agreement, property valuations, parent company guarantees and bonds, cash collateral, and by obtaining floating charges from the parent company.15
Where development and construction is anticipated, lenders may also require approval of material development documentation as a condition precedent in order to draw down and may expect to receive collateral warranties or third-party rights from contractors, designers and key sub-contractors. Step-in rights may also be sought in order to take over a contract in the event of default.
iv Tax considerations
Stamp duty land tax (SDLT) is payable by the buyer of commercial real estate and is a percentage of the purchase price, varying depending on the consideration paid for the property. For investors to avoid paying high tax rates for individual real estate assets, it is better for the shares in the vehicles themselves to change hands. SDLT does not apply to the purchase of shares in companies holding real estate assets. The rate of stamp duty on the transfer of shares in a UK-incorporated company is 0.5 per cent.
If real estate assets are sold and purchased directly, the default position is that the sale or purchase in the United Kingdom is not subject to VAT, though owners can opt to tax the property at the standard rate of 20 per cent. Generally, most sellers opt to tax. Where a property is let to tenants, VAT can be mitigated by ensuring the sale is treated as outside the scope of VAT as a transfer of a business as a going concern, provided the buyer continues letting the business and opts (and notifies HMRC that it has opted) to tax.
Interest charges on borrowings are deductible expenses for tax purposes, so gearing will generally result in tax efficiency. Many real estate investors introduce borrowing to achieve this result. In such circumstances, it is important that any loan arrangement is ‘at arm’s length’. Loans that do not meet that commercial threshold will not qualify as deductible.
Currently all borrowing costs are deductible to reduce taxable profit, but changes in April 2017 will limit the amount of deductible interest to 30 per cent of the owner’s EBITDA. This restriction is likely to apply equally to UK and non-UK owners.
v Cross-border considerations
Where a foreign investor is proposing to carry out a ‘trading’ activity in relation to property (including development), historically it has been appropriate to hive off that activity into a separate entity for tax purposes. Consequently, the typical structure in these circumstances is that the property-holding company is combined with an operating company (usually a non-UK ‘propco’) to shelter capital gains and a UK ‘opco’ will carry out the trading activity.16
Any development or other services to be carried out will be undertaken by the UK opco and any charges rendered by the opco to the propco should be allowable against the propco’s taxable income. In addition, any VAT charged to a propco will be recoverable where the propco has ‘opted to tax’.17
Under new rules, the non-UK propco may be deemed to have a ‘permanent establishment’ in the United Kingdom by virtue of its ownership of the development site or property. Consequently, the profits of the propco will become subject to UK corporation tax. The timing of this change is uncertain but any non-UK propco that owns a development site or property in the United Kingdom may well now find itself subject to UK corporation tax on its profits arising from April 2016.18
Following the outcome of the EU referendum, the United Kingdom is expected to enter a period of uncertainty and it remains to be seen how the real estate M&A market will behave over the course of the next 12 to 24 months (and in the longer term). Financial and political instability have historically reduced M&A activity substantially.
Many predicted a rise in investment activity throughout the second half of 2016 following a ‘remain’ vote. The ‘leave’ vote has caused many investors to pause and wait for clarity. It is likely they will adopt a more cautious approach and reconsider their long-term strategies and, consequently, investment activity may be suppressed for a time.
In London, investment is expected to stall temporarily. A weakened demand for commercial space is forecast, which could push retail and office values down by 15 per cent to 20 per cent over the next 18 months.19 Consequently, development projects are likely to be suspended as developers re-evaluate their positions. Property prices generally are also expected to drop by 10 to 20 per cent over the same period.20 Given these forecasts, owners may be unwilling to dispose of good assets, at least in the short term.
Elsewhere in the country, investment is likely to continue given the potential for growth (Manchester and Birmingham have seen high demand from investors in recent years), but at a slower pace. Transaction levels were already muted by a lack of available stock and development finance and that trend is likely to continue, with debt finance potentially more difficult to acquire.
Further instability is expected after a number of open-ended funds21 suspended trading on their real estate funds following withdrawal requests after the Brexit vote, which has affected their liquidity. Other funds continue to monitor redemption requests, but the Bank of England has warned that if the market continues to worsen, commercial real estate companies that use debt to buy property may not be able to access that money. Further, forced sales or falling values could detrimentally affect the ability of property companies to lend money; many are concerned that their lending will become restricted if their activities are deemed more risky.
However, despite the current climate, the UK real estate sector remains attractive – the United Kingdom’s well-established legal, tax and planning systems, transparency and lack of corruption means investors continue to see opportunity and consider the United Kingdom a safe jurisdiction in which to operate – and consequently it may become one of the few defensive sectors to prevail, even if the current uncertainty affects deal flow in other sectors.
Short-term political uncertainty can create buying opportunities and may result in a boost in the property market as investors deal at slightly deflated prices. Commercial property is also still seen as a ‘safe haven’ asset. Foreign investors often invest in UK commercial property to escape debt crises or other economic problems at home; leaving the EU is unlikely to change this in the long term.22
It is also possible that a weaker sterling could attract more investment into the property market. The strength of the pound compared with emerging currencies has in the past tended to make property investments less appealing to some investors. Leaving the EU could reverse this situation.23
Finally, it is worth noting that, historically, access to the single market has not been the main driver for real estate investment in the United Kingdom. Consequently, the impact of leaving the EU could be negligible as most foreign capital coming into the UK property market is for investment rather than operational purposes.
1 Richard Smith is a partner and Chris Smith is an associate at Slaughter and May.
2 Investment volumes reached £66.3 billion in 2015, compared with £61.7 billion in 2014 (see Lambert Smith Hampton, ‘UK Investment Transactions Bulletin Q4 2015’ (www.lsh.co.uk/~/media/files/lsh/pdfs/research-reports/ukit/34141-lsh-ukit-q4-2015.ashx)) (accessed 20 June 2016).
3 Investment volumes for the first quarter of 2016 were at £11.9 billion, down 26 per cent on the previous quarter (see Lambert Smith Hampton, ‘Uncertainty weighs on London’ (www.lsh.co.uk/~/media/files/lsh/pdfs/research-reports/ukit/34244-lsh-ukit-q1-2016-e.ashx)) (accessed 20 June 2016).
4 The mandatory offer was triggered as a result of Stork Holdco’s acquisition in 2014 of Songbird Estates for £4.8 billion. Songbird owned a 69.3 per cent stake in CWGP, which meant Stork Holdco’s acquisition gave rise to the mandatory offer to acquire the remaining shares of CWGP. Following the acquisition, Stork Holdco combined Songbird and CWGP into a single operating entity.
5 Currently 20 per cent, set to drop to 19 per cent from 1 April 2017 and then to 17 per cent from 1 April 2020.
6 The official UK list or the official list of another country having a recognised stock exchange.
7 See Knight Frank research (2014), highlighted in White and Case’s ‘Spotlight on London real estate’ (http://events.whitecase.com/insights/Insight_SpotlightOnLondonRealEstate.pdf) (accessed 28 June 2016).
8 See White & Case, ‘London calling: Investing in commercial real estate’ (2014) (www.whitecase.com/sites/whitecase/files/files/download/publications/print-London-calling-Investing-in-commercial-real-estate.pdf) (accessed 28 June 2016).
9 See BNP Paribas, ‘BNP Paribas Real Estate Guide to Investing in London 2015’ (2014) (https://www.realestate.bnpparibas.co.uk/upload/docs/application/pdf/2015-04/investing_in_london_guide_2015_-_bnp_paribas_real_estate_uk.pdf) (accessed 28 June 2016).
10 Financial Times, ‘Property is one-third of alternative assets’ (13 July 2015).
11 See Savills, ‘Spotlight: UK Student Housing’ (2015) (http://pdf.euro.savills.co.uk/residential---other/spotlight--uk-student-housing-2015.pdf) (accessed 28 June 2016).
12 See Practical Law, ‘Private mergers and acquisitions in the UK (England and Wales): market analysis overview’ (http://uk.practicallaw.com/6-546-2709?source=relatedcontent) (accessed 29 June 2017).
13 Estates Gazette, ‘Corporate real estate transactions: buyer beware’ (7 March 2015).
15 See Herbert Smith Freehills, ‘A legal guide to investing in the UK for foreign investors’ (2012) (www.herbertsmithfreehills.com/-/media/HS/L050712154578912171416219.pdf) (accessed 27 June 2016).
16 See Withers, ‘Taxation of investment in UK commercial real estate’ (www.withersworldwide.com/news-publications/taxation-of-investment-in-uk-commercial-real-estate--2) (accessed 28 June 2016).
19 See the Wall Street Journal, ‘Brexit Vote Roils Real-Estate Markets’ (www.wsj.com/articles/brexit-vote-roils-real-estate-markets-1467146797) (accessed 29 June 2016).
20 Financial Times, ‘Developers rethink London property schemes’ (28 June 2016).
21 Standard Life, Aviva Investors and M&G Investments.
22 See DLA Piper, ‘Brexit and the UK commercial property market’ (https://www.dlapiper.com/en/uk/insights/publications/2016/06/brexit-and-the-uk-commercial-property-market/) (accessed 28 June 2016).
23 When sterling fell during the financial crisis, many foreign investors turned to the United Kingdom and bought up property in prime central locations at relatively cheap prices.