Foreign investment serves much of the UK commercial property space, and insurers need to be aware of the benefits and drawbacks of the decision to leave the EU in relation to overseas investment in the market.
Commercial property in the UK is a prize asset for both domestic and foreign investors. Much of the take-up is occurring in London, as buyers purchase varying property types including retail outlets, office blocks, and storage facilities. For overseas buyers, the UK is an attractive investment due to its commercial appeal and, before the June 23 Leave vote, its connection to neighboring countries.
For commercial property insurers, the decision to leave bodes well – at least on the surface. A burgeoning and well-connected economy improves the prospects of commercial property construction, thus meaning more properties to insure and greater market coverage. However, our research shows that while overseas buyers have continued to flood the market, some are choosing to insure their assets with a provider in their home countries, which is reducing market share and resulting in less business opportunities for UK providers
The decision to leave the EU is likely to reduce the number of overseas investors buying commercial property in the UK, and the effects of the vote are already beginning to resonate. Foreign banking providers are assessing the investment risk of London property assets, particularly those from the Australasia markets, causing some to halt the supply of loans to the commercial property space. Singapore’s United Overseas Bank has taken urgent action, suspending its loans program for London propertiesas a result of what it called uncertainties in the wake of the EU referendum.
On the one hand, deterring overseas buyers may also deter competition from overseas insurers, thus helping UK providers maintain market share. But on the other hand, overseas investment is a primary driver of the market, especially within inner-city areas, and a fall in the number of purchases may reduce the size of the market and thus diminish opportunities for insurers.
As with most other commercial business segments, the market works better when it is free of any trade restrictions and international investment is a possibility, particularly in commercial property. The vote to leave the EU makes conditions in the market difficult, especially since progression is only really achieved if it creates opportunities for itself, i.e. more properties for insurers to cover. Without foreign investment, the chances of this happening are less certain. Either way, commercial property insurers are now face a bit of a dilemma, and must prepare for the potentially damaging effects of the EU exit.
By Thomas McCourtie, General Insurance Analyst