Prospect Of Corbyn Government Means This Global Investor Is Avoiding The UK

Private equity firm KKR is raising capital for its second European real estate opportunity fund. But for the time being it won’t be spending any of that in the UK.

There has been a slowdown in London and UK real estate investment in 2019, with year-on-year volumes down 13% to the end of April, according to Real Capital Analytics. The blame for that is generally attributed to Brexit uncertainty. But the chaos over the deadline for leaving the EU is not the only thing causing global investors to bypass the UK.

The prospect of a government led by Labour leader Jeremy Corbyn has caused private equity KKR to put a bar on UK real estate investing, unless an incredibly compelling deal turns up.

“Our other big concern is the C word, Corbyn,” KKR Head of European Acquisitions Seb D’Avanzo told the audience at Bisnow’s London Capital Markets Review event.

“We see a path to Corbyn getting in. It might not be my view, but our public affairs team, that’s their base case: that at the end of this year there’s a general election and Corbyn leads a minority government. With that as a backdrop it’s pretty hard to invest in the UK.”

The thinking is there could be a general election because the arithmetic of Parliament means no one can govern right now. Anyone who wins the Tory leadership election will have to call a general election.

“With that as a backdrop you have to look at whether that risk [of a Corbyn-led government] is priced in, and in our view it’s not, so we’re cautious on the UK.”

D’Avanzo said the firm bought a portfolio of four student housing developments across the UK totalling 1,815 beds, because this sector is somewhat insulated from the effect of political uncertainty.

“One reason we preferred student housing to other asset classes is that we see it as a bit of an export market. A lot of the underlying consumers are overseas students, and so the weakness of the pound has been a positive for that sector,” he said.

In the year after Brexit there was a 30% increase in Chinese students, he said.

“So that’s why we’re positive on that sector, but elsewhere the risk isn’t priced in. Occupational markets are pretty strong apart from retail, and we’re not seeing that many opportunities, so its hard to find value with that kind of backdrop.”

D’Avanzo’s fellow panellists had differing views on the likelihood and potential impact of a Corbyn government, with elections to the European Parliament looming.

“I was always taught by my father, vote Conservative, but as a real estate person you make a lot of money under Labour, because they inflate the economy and invest and it’s good for real estate,” EQT partner and Head of Real Estate Rob Rackind said. “But you have to know when to get out early because it’s all going to come crashing down. This time around it’s different, because Corbyn is a form of Labour that hasn’t been around since the 1970s, and that is difficult to understand. Will he temper his rhetoric and see sense, or will he nationalise industries and there’s a run on the pound? No one truly knows yet.”

“It’s hard to see a situation from our perspective where Corbyn gets such an outright majority that he is able to implement the radical policies he’s talking about,” Hines European Chief Investment Officer Alex Knapp said. “What is much more likely is some sort of coalition, and if you look at the Conservatives and Labour right now they are both being cut laterally at the waist by Brexit, where they don’t know how to placate their party. So the situation where Corbyn has some sort of majority doesn’t seem like a main case scenario. What is much more likely is some sort of muddling, middling coalition.”

A Corbyn government may not be all bad news for real estate, according to one counterintuitive view.

“If you take a European context: Amsterdam, Berlin, Barcelona, these are three of the most left-leaning cities in Europe,” Blackstone Head of European Real Estate Acquisitions Samir Amichi said. “Some of the discussions that are happening in Berlin, frankly, Corbyn wouldn’t bring up in the UK, and these are three of the best-performing markets in Europe for regular real estate, like office and residential.

“To pick up on Rob’s point, typical planning policies of left-leaning governments tend to have positive impacts on the value of real estate, particularly existing real estate.”

Even if the UK successfully negotiates a smooth exit from the EU, real estate investors won’t be able to turn off the politics news.