24 May 2016

Think Global, Not Brexit

Article Image: 
Think Global, Not Brexit thumbnail
by Simon Hedger, Global Portfolio Manager, Real Estate Securities

Simon Hedger is a global property securities portfolio manager for Principal Global Investors, along with Anthony Kenkel and Kelly Rush, Head of Global Real Estate Securities.

With the United Kingdom (UK) due to hold a referendum on the 23rd June on whether to continue its membership of the European Union (EU), we are frequently asked about the potential impact Brexit (Britain’s exit from the EU) could have on the UK property sector.

As we see it, there are two issues that need to be taken into account to form a view on the topic. The first issue involves current market fundamentals; therefore what’s the essential status of the UK property market at the moment. The second issue is how a Brexit might impact that status should Britain vote to leave the EU.

Looking at market fundamentals the UK listed real estate sector has provided very strong returns over the past two to three years. From what we see on the horizon (an economy that continues to recover nicely and interest rates remaining relatively low), we do not expect any change in the level of leasing demand. The Central London office market, which has been a key beneficiary of the current real estate cycle, remains very strong, with a vacancy rate of just 2-3%. The vacancy rate in London’s West End is even lower.

That said, there are some market-participants projecting that new supply will spike in 2018. However, our knowledge of the UK planning regime would indicate that developers involved in those pipeline projects are not going be able to get funding or planning permission to enable the new supply to come on stream in 2018 as forecasted. Accordingly, we do not see supply in cities as an issue; the bigger issue is demand, and that is where a Brexit could be critical.

In terms of the expected outcome of the June referendum, it is likely the UK will vote to remain in the EU. In that event, financial markets should respond with heavy support for British sterling (which has fallen significantly in recent times against most major currencies) and those stocks currently discounted due to fear of a potential UK exit. If, however, a Brexit is chosen, sterling would likely fall further, along with other financial market indices as investors struggle to come to terms with the depth and duration of the impact the Brexit would have on both the UK and European economies. Given our opinion, that the UK will remain part of the EU, we have taken advantage of discounted stock opportunities focused on the London office market, in the expectation they will rally on the result of the Referendum.

While it is natural for investors’ to be concerned about the potential impact of a Brexit, the best way to protect a portfolio against the vagaries of an individual market, country, or region is diversification. In the case of listed real estate, that diversification should be global. Real estate markets across the globe are typically driven by local factors, particularly supply and demand. So, conditions in the office markets in Singapore, Sydney, London, and New York can vary significantly from each other at any single point in time. That is because each market may be at a different stage of the economic and/or real estate cycle. A globally-oriented portfolio has the flexibility to look for global opportunities, moving from a more mature market to a recovering market, while also taking advantage of mispricing in the market. In a global investment context, the UK property market, and the potential impact of a Brexit, is just one variable and possibly an opportunity! Being overweight to this theme is properly measured to contribute to alpha generation if we are proven correct.



The information in this document has been derived from sources believed to be accurate as of April 2016. Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision.

The information in this document contains general information only on investment matters. It does not take account of any investor’s investment objectives, particular needs or financial situation and should not be construed as specific investment advice, an opinion or recommendation or be relied on in any way as a forecast or guarantee of future events regarding a particular investment or the markets in general. All expressions of opinion and predictions in this document are subject to change without notice. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that Principal Global Investors or its affiliates has recommended a specific security for any client account.

Principal Financial Group, Inc., Its affiliates, and its officers, directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy (including by reason of negligence) arising out of any for error or omission in this document or in the information or data provided in this document.

All figures shown in this document are in U.S. dollars unless otherwise noted.

This document is issued in:

• The United States by Principal Global Investors, LLC, which is regulated by the U.S. Securities and Exchange Commission.

• The United Kingdom by Principal Global Investors (Europe) Limited, Level 1, 1 Wood Street, London EC2V 7JB, registered in England, No. 03819986, which has approved its contents, and which is authorized and regulated by the Financial Conduct Authority.

• Singapore by Principal Global Investors (Singapore) Limited (ACRA Reg. No. 199603735H), which is regulated by the Monetary Authority of Singapore and is directed exclusively at institutional investors as defined by the Securities and Futures Act (Chapter 289).

• Hong Kong by Principal Global Investors (Hong Kong) Limited, which is regulated by the Securities and Futures Commission and is directed exclusively at professional investors as defined by the Securities and Futures Ordinance.

• Australia by Principal Global Investors (Australia) Limited (ABN 45 102 488 068, AFS License No. 225385), which is regulated by the Australian Securities and Investment Commission.

• This document is issued by Principal Global Investors LLC, a branch registered in the Dubai International Financial Centre and authorized by the Dubai Financial Services Authority as a representative office and is delivered on an individual basis to the recipient and should not be passed on or otherwise distributed by the recipient to any other person or organization. This document is intended for sophisticated institutional and professional investors only.

• Japan by Principal Global Investors (Japan) Ltd. (Kanto Local Finance Bureau (Kinsho) No. 462, Japan Investment Advisers Association; Membership No. 011-01627).

In the United Kingdom this document is directed exclusively at persons who are eligible counterparties or professional investors (as defined by the rules of the Financial Conduct Authority). In connection with its management of client portfolios, Principal Global Investors (Europe) Limited may delegate management authority to affiliates that are not authorized and regulated by the Financial Conduct Authority. In any such case, the client may not benefit from all protections afforded by rules and regulations enacted under the Financial Services and Markets Act 2000.

This material is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.

Copyright 2016 Principal Financial Services, Inc.

Real estate investment options are subject to some risks inherent in real estate and real estate investment trusts (REITs), such as risks associated with general and local economic conditions, interest rate fluctuation, credit risks, and liquidity risks, including interest conditions on real estate values and occupancy rates. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards.

Investing involves risk, including possible loss of principal.

Insurance products and plan administrative services provided through Principal Life Insurance Co. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities offered through Principal Securities, Inc., 800-547-7754, Member SIPC and/or independent broker/dealers. Principal Life, Principal Funds Distributor, Inc. and Principal Securities are members of the Principal Financial Group®, Des Moines, IA 50392.

MM8614 | t160520019c