Brexit clauses in UK property deals as Gulf investors hold back

UAE buyers among tose keeping powder dry as vote looms and new rights are built into contracts in commercial real estate sector.

Apartment buildings and commercial towers at Canary Wharf in London. Fears of a Brexit are influencing the UK property market. Reinhard Krause/Reuters
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Commercial property investors are writing clauses into contracts giving buyers the right to walk away from real estate deals if Britain votes to leave the European Union this month, as a way to unfreeze a sector stalled by uncertainty over Brexit.

The moves come as Arabian Gulf investors, some of the biggest buyers of British real estate, are holding back from new deals because they fear a property price slump if Britain does leave the EU, according to legal and investment sources.

Among Gulf Arab investors sovereign and private investors from Qatar, Saudi Arabia, Kuwait and the United Arab Emirates have been prolific buyers of British assets in the past decade, snapping up billions of dollars worth of property, mostly in London.

“Sovereign wealth funds are concerned that Brexit is taking its toll on the property market in London,” said a London-based lawyer who works with some of the largest Gulf funds. He declined to be named, citing the confidential nature of his work.

“The situation will further deteriorate if there’s a Brexit vote.”

The overall value of residential property in upmarket areas popular among Gulf investors – including Chelsea, South Kensington and Knightsbridge – fell between 3.5 and 7.5 per cent on the year in May, according to the estate agent Knight Frank, although some areas did better.

Investors from the UAE accounted for more than 20 per cent of buy-to-let property sales in the UK in 2015, said Amit Seth, the Middle East and North Africa head of international residential developments at the London-focused estate agency Chestertons.

“At the moment it seems clear people are little bit more sceptical on making an investment today because of Brexit,” said Mr Seth, who is based in Dubai, referring to private Gulf investors in residential property.

He said investors were still researching opportunities and discussing them with his company, but not finalising deals.

While the precise impact on Gulf investments is unclear, overall flows of foreign capital into commercial real estate in Britain stopped in the first three months of 2016, the Bank of England governor Mark Carney said in April. Business investment in the country also fell in early 2016, statistics showed last week.

Asked to comment on Gulf investor concerns, Tobias Ellwood, a British foreign office minister, said the EU referendum was a significant event that had been discussed as part of regular bilateral engagements covering a wide variety of areas.

“But [it] has not been raised in any form in relation to impact on investment opportunities, which go from strength to strength,” he said last month.

Sheikh Hamad Al Thani, a former Qatari prime minister and an investment chief who oversaw much of the country’s UK acquisitions, has spoken out against a “leave” vote.

“In the Middle East we all want to see a strong Europe, and believe that economic integration is key to making it stronger. In fact, we believe the UK should not only be part of the EU but should lead it,” he told Reuters, describing the City of London as the “financial capital of the world”.

Qatar is one of the most high-profile investors in London, owning landmarks such as the Shard ower, Harrods department store and Olympic Village, as well as luxury hotels. It also leads a consortium that bought the owner of the Canary Wharf financial district last year.

Sheikh Hamad said in April that Qatar’s total investments in Britain were about £30bn.

Kuwait Investment Authority is also a major investor through its London-based Kuwait Investment Office. In 2013 it said the fund had more than doubled its investment in Britain over the previous 10 years to more than $24bn.

Like Qatar, Kuwait owns London landmarks such as the More One riverside development which houses the headquarters of the mayor, as well as buildings in Canary Wharf. It has focused on infrastructure investments through its Wren House Infrastructure Management arm set up in 2013.

Uncertainties about the legal and regulatory framework that would result from a Brexit is a worry for any large investor in Britain, said Fabio Scacciavillani, the chief economist at Oman Investment Fund.

“If the region’s sovereign wealth funds have invested in UK assets they would be rightfully concerned for their long-term returns outlook,” he said, adding most would put their decisions on hold until after the vote.

“Brexit implies a long and potentially thorny period of adjustment as the UK will need to negotiate trade relationships.”

Meanwhile, transactions in commercial property fell by 40 per cent in the first quarter, according to the Bank of England, spurring a revamp of standard purchase and sales contracts.

In one example from a commercial transaction seen by Reuters, a clause sets a deadline after the Brexit vote when the buyer would be permitted to terminate the contract if the referendum results in a decision to leave.

Sellers, too, are taking legal precautions, seeking language in contracts to ensure that Brexit will not be considered a “material adverse change” that would annul a deal.

Paul Firth, the head of property at the law firm Irwin Mitchell, said a significant per cent of the firm’s “bigger investment deals” with values ranging from £10m to £80m either included Brexit clauses, or purchasers had sought to negotiate that they be included.

He said the use of such clauses had increased in recent weeks as the referendum date draws closer.

“[Investors] fear that the value and return on investment properties may decline and that it may not be as good an investment if Britain withdraws from the EU,” he said.

Since commercial real estate deals are usually confidential, it was not possible to determine precisely how common such clauses are.

However, half of the 24 law firms, brokerages and commercial property firms Reuters spoke to said they had used Brexit clauses, brokered a deal with such a clause or had requests to include them in at least one deal. Some of the others said they had seen them.

The prime minister David Cameron and other politicians supporting the campaign to stay in the EU say a vote to leave would damage the economy and cause property prices to fall. Those campaigning to exit say any such threat is overblown and Britain can prosper outside the EU.

But whether overblown or not, it is a risk some buyers seem unwilling to take.

Guarantees are being offered not only for commercial property but also for homes. An invitation to a May 25 launch of some floors of Two Fifty One, a 41-storey luxury apartment tower going up in south London’s gentrifying Elephant and Castle district, offered buyers a “money back Brexit guarantee pledge”.

Buyers attending the launch would not have to exchange contracts until July 6 and could withdraw their offer and get their deposits back if they were unhappy with the outcome of the vote, said Martin Lent, the chief executive of SCM, the development manager for the project by residential developer Oakmayne.

In commercial property, Brexit clauses are more common in higher-value deals where the risks are greater, said Andrew Friend, a director of a UK property fund at Henderson, one of Europe’s largest investment managers.

“Deals that include these clauses tend to be at the higher lot size end of the market and they’re more focused on sectors such as financial office space in London, which are more sensitive to a Brexit type situation,” said Mr Friend.

Brexit clauses are particularly in demand among overseas investors. Two lawyers dealing with property said most enquiries about Brexit clauses were from foreign investors who were concerned that an “Out” vote could weaken sterling, as well as reduce appetite for leasing commercial space in Britain.

“When it comes to international investors looking to build global or European portfolios, we are either ‘on hold’ or would use a Brexit clause,” said Rob Wilkinson, the chief executive of AEW Europe, a property manager property.

Melanie Curtis, a real estate partner at the law firm K&L Gates, said she had worked on a deal with a Brexit clause in a commercial property transaction worth more than £10m, in which her firm acted on behalf of an overseas buyer.

“The buyer required a Brexit clause, as it may reassess its UK investment policy in the event of withdrawal from the EU.”

James Crookes, the head of real estate and property at the law firm Pinsent Masons, said some clauses, rather than giving the buyer the right to walk away or renegotiate, would automatically reduce the purchase price of a property in the event of a Brexit vote. In one deal, the price would be lowered by £1m.

“So they’re factoring in a valuation on the assets based on Brexit.”

Nick Lloyd, the national head of capital markets at the commercial property broker Lambert Smith Hampton, said offering Brexit clauses could also be beneficial for sellers, to secure deals while fewer transactions are taking place, in anticipation of a potential flood of properties returning to the market if Britain votes to remain in the EU.

“Whilst they mitigate downside risk for buyers, they can be attractive to a vendor who wants to avoid the risks of marketing during a potential oversupply of new stock after the referendum,” said Mr Lloyd.

But with less than a month to the vote, two law firms and one property broker said they were now advising clients to reject demands for a Brexit clause and simply put deals on ice.

“One seller recently asked the buyer to confirm it would proceed with the purchase irrespective of the outcome of the referendum,” said Mark Payne, a partner in the property team at the law firm Clifford Chance.

“This proposal was, however, rejected.”

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