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Johnson Win Brings Long-Awaited Clarity for U.K. Real Estate

Jack Sidders
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Why London’s Commercial Property Market Is Set for 2020 Revival

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The Conservative Party’s emphatic victory in the U.K. general election has given the country’s real estate market what it’s been craving for more than three years: the prospect of some political certainty.

Prime Minister Boris Johnson now has the votes he needs to push his Brexit deal through Parliament. For investors and developers who have been waiting for clarity on this issue since voters backed Britain’s withdrawal from the European Union in mid-2016, the election result brings with it the possibility of increased deal-making and new projects.

Investors have been cautious about committing to deals while it remained unclear if Parliament would ever pass a withdrawal agreement that would alleviate the risk of a disorderly divorce. Deals for London offices fell by almost half in the first nine months of this year, as the U.K. staggered through three missed Brexit deadlines and the election campaign, according to data compiled by broker CBRE Group Inc.

“The certainty that a parliamentary majority provides is incredibly welcome,” said Neil Sinclair, chief executive officer of landlord Palace Capital Plc. “Investors will now have the appetite to go ahead and commit.”

The Conservative win drove the shares of real-estate companies higher on Friday, with the FTSE 350 Real Estate Investment Trust Index up as much as 6.6%, led by London office landlords. Land Securities Group Plc, the U.K.’s largest REIT by assets, rose as much as 7.9%, followed by companies including flexible-office operator Workspace Group Plc.

London offices have been trading at a wide discount to other Western European capitals. That could narrow as a result of the Conservative win, according to Bloomberg Intelligence senior real estate analyst Sue Munden.

“The Conservative majority is likely to ignite demand for London offices, increasing liquidity and shaving yields,” Munden said. A re-energized market in the U.K. capital could result in firmer prices and boost the value of property portfolios held by REITs such as Land Securities, British Land Co. and Derwent London Plc, she said.

While developers have taken a cautious approach to starting new projects, companies including Linklaters have continued to seek new office space this year. That’s helped keep rents and values high.

With all but one seat declared, the Conservatives had won 364 of the 650 seats in the House of Commons, a gain of 47, to Labour’s 203 seats, down 59. That puts the Conservatives on course for their biggest majority since 1987 under Margaret Thatcher.

Johnson committed to taking the U.K. out of the EU by the end of January if he secured a majority, and every Conservative candidate signed a pledge to approve his deal. Once Britain has left, it can begin negotiations on its future trading relationship with the bloc.

Under the current timetable, the U.K. has until the end of 2020 to conclude a free trade agreement with the EU, a deadline Johnson has said he won’t break. That’s a tight schedule, given that the EU’s trade deals with other countries have often taken longer to finish.

“A Tory majority is the most positive or benign outcome for business and the real estate market, but I don’t think this is going to lead to any sudden euphoria or an investment spree into the U.K.,” said Rob Wilkinson, chief executive officer of AEW Europe SA, a real estate investor with about 70 billion euros ($77.8 billion) of assets under management.

Wilkinson said “critical uncertainties” will still remain, particularly around whether Brexit can be completed by the end of January and a trade deal can be done on schedule.

That could mean any boost in activity is short-lived, as the prospect of a messy separation emerges again toward the end of next year, rekindling fears of widespread economic disruption and job losses.

“The clock will start ticking very quickly toward end-2020 when the transition period comes to an end,” said Zachary Gauge, a real estate analyst at UBS Group AG’s asset management unit. “Based on the experience of the previous three and a half years, it’s very difficult to see how all the details of the future trading arrangements can be tied up within 11 months.”

(Updates with shares in fifth paragraph, analyst’s comment starting in sixth.)

To contact the reporter on this story: Jack Sidders in London at jsidders@bloomberg.net

To contact the editors responsible for this story: Shelley Robinson at ssmith118@bloomberg.net, Patrick Henry

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