U.K. REITs So Ready for Hard Brexit That Soft One May Hurt More

• U.K. REITs So Ready for Hard Brexit That Soft One May Hurt More

The U.K.’s biggest real estate investment trusts are so well prepared for a rough Brexit, they could suffer if it doesn’t turn out to be all that bad.

The six largest London-focused REITs, including Land Securities Group Plc, British Land Co., and Great Portland Estates Plc, have hoarded cash equal to about a third of the total spent annually on central London office buildings, Bloomberg Intelligence senior industry analyst Susan Munden wrote in a note Tuesday. Spending it wisely will be a challenge if Brexit doesn’t cause prices to drop as much as expected, she wrote.

The U.K.’s vote to leave the European Union triggered panic withdrawals from property funds amid concerns that demand for commercial buildings would fall. Deal volumes recovered in the last quarter of 2016 as demand for office space held up better than expected and investors kept their faith in real estate and the premium returns it offers over stocks and bonds.

“The outlook for London offices remains a challenge, but losses of about 50,000 workers phased over several years could be absorbed with modest rent and value declines,” Munden wrote. “Some U.K. REITs are so well positioned for the downside that they face re-engagement risks if a crash doesn’t materialize.”

Land Securities, the U.K.’s largest REIT, announced in 2014 it would not start any new London offices without securing tenants in advance. Like many of its rivals including British Land and Great Portland Estates, it has also been selling large buildings to reduce debt and raise cash for purchases when prices fall.

Brexit’s impact on the London office market has been exaggerated, with deals and rents gradually declining from a 2015 peak, according to a note published by fund manager Fidelity International Tuesday. Banks haven’t been a significant source of demand for new office space for several years and the loss of some jobs will therefore have less impact than cyclical factors like the rising supply of new buildings in the City of London financial district, the fund manager said in an email.

Offices in the City will generate total returns, value increases combined with rent revenue, of 5.3 percent a year from 2017 through 2021, Fidelity head of research Matthew Richardson said in an email. “Medium-term performance will be driven largely by property market fundamentals rather than fallout from Brexit,” he wrote.

Developers like Shaftesbury Plc, Derwent London Plc and Workspace Group Plc will find it easier to navigate the uncertainty caused by Brexit as they typically focus on small or medium developments, which are lower risk, according to Munden. Large buildings usually require leasing agreements prior to construction or venture partners to reduce risk, she wrote.