Brexit Fire Sale? NEC On Offer For £800M As Economic Risks Mount
These are scary times. The government is not denying that a "no deal" Brexit means the stockpiling of food and medicine whilst according to the head of Amazon U.K., crashing out of the EU risks imminent civil unrest. Brexit talks appear stuck in summer deadlock.
Is the pending £800M NEC sale just an owner being opportunistic, or is it the most conspicuous example of selling before Brexit-related economic shocks knock back the price?
Or is the real worry behind the sale not Brexit, but the U.K.'s exposure to China's debt bubble?
The decision by LDC, Lloyds Banking Group's private equity arm and majority owner of the NEC, to sell the 2M SF exhibition centre next to Birmingham Airport was scarcely a surprise. It had been expected since December 2017.
What was surprising was the price — £800M, about £200M ahead of market expectations late last year — and the precise timing.
NEC Group has hired Bank of America Merrill Lynch to launch a sale, Sky News reports.
LDC agreed the £307M purchase of the National Exhibition Centre and the International Convention Centre in January 2015. The sale of a long-lease by Birmingham City Council allowed the NEC Group (which owns both centres, along with the Genting Arena and the Barclaycard Arena) to pay off its debts and grow the business.
Revenue has been rising sharply thanks to investment and a portfolio of events that includes the annual Crufts dog show and will feature in the 2022 Birmingham Commonwealth Games.
If the price reaches — or exceeds — the £800M target, questions are sure to be asked about the advice Birmingham City Council received, and the deal it cut in 2015.
Speculation also centres on motives for the sale, which has been pushed forward to mitigate the Brexit risks posed to large lot-size asset sales, Sky News reports.
Chinese Risks
Economic data paints a confusing picture.
Recent IMF projections suggest a no deal Brexit would knock 4% off U.K. GDP (compared with 5.9% cumulative loss of U.K. GDP in the Great Recession). The U.K. government estimated the impact at 10.3%, but there is a range of figures from various sources, none of them good. The common ground is that the economic consequences would be "challenging" — the word used by Foreign Secretary Jeremy Hunt after discussions with the German Foreign Minister on 23 July.
Mid-year investment data from JLL suggest real estate has thus far avoided a Brexit-related hit.
In the U.K., the analysis finds that the risk of a Brexit shock has receded, while the positive background for real estate is also being supported by an independent monetary policy, an improved fiscal position, the continued strong, flexible labour market and an inexpensive currency.
JLL said continued low bond yields make income-producing real estate look attractive, while London will continue to appeal to investors thanks to high liquidity and transparency and deep human capital pools. JLL points to continued strong occupational demand and prospects for rental growth in the office and industrial sectors.
But even supposing the U.K. leaves the European Union in good order, with a serviceable deal and transition period to December 2020, the Bank of England is pointing to another risk ahead.
The U.K. is by far the economy most exposed to Chinese debt: roughly three times as much Chinese debt is associated with the U.K than with the U.S., an economy roughly seven times larger.
As a result the Bank of England warns that even a modest shock to the Chinese economy would knock 0.5% off U.K. GDP. In the worst case this could mushroom to 1.4%.
If some — or many — of the principal potential buyers of the NEC are from the Far East, this is of more than passing interest.
Prize Winners?
At least one source of anxiety seems to have diminished: the imposition of controls on outbound Chinese capital in 2016 does not seem to have seriously damaged the global real estate sector, according to JLL. In April this year the controls were relaxed, following President Xi Jinping’s pledge to internationalize China’s financial system.
The conference and convention centre business took a dive during the 2008-2012 recession but thanks to regular events and a bounce in business confidence, it has since recovered. This has prompted some owners to think now is the time to sell.
In April 2017, Capco sold Venues, the exhibition business that includes Olympia London, in a £296M deal with German pension funds and insurers advised by investment firm Deutsche Finance International. U.K.-based Yoo Capital was co-investor.
Others have followed Capco's lead. As recently as June 2018, Unibail-Rodamco indicated it would dispose of non-core businesses following its purchase of shopping centre business Westfield. The company owns 10 convention centres throughout Europe, with a heavy emphasis on its Paris base.
