By Esha Vaish
(Reuters) - In Britain's regions, smaller investors are securing discounted deals on commercial property as heavyweight funds put purchases on ice ahead of the referendum on EU membership.
Defying an investment lull in the capital, regional property markets have been enlivened by private equity firms and other small investors taking advantage of reduced competition for office and retail space in cities such as Birmingham and Leeds.
These nimbler investors have less assets under management and normally have less funds readily available to commit than big institutional investors such as insurance companies, pension funds and sovereign wealth funds. However, the current uncertainty has opened up a window of opportunity.
"Most investors can't make any investment decision up until the Brexit vote," said David Pralong, founder of pan-European investment advisory firm Maya Capital LLP. "This allowed us to get access to assets that would have been difficult to secure under normal circumstances."
In the last few weeks, Maya has made successful offers for four office premises costing a combined 50 million pounds ($72 million).
The concern for some investors is that an "Out" vote could end Britain's unlimited access to the world's largest trading bloc, hurting growth and undermining London's status as the only financial capital to rival New York. Banks have been particularly vocal in warning this might force them to relocate.
By contrast, the largest occupiers of regional premises tend to be domestic companies and retailers that would be unlikely to shift in the event of Brexit, despite the business risks.
Property managers at Fidelity International and M&G Real Estate, a unit of insurer Prudential Plc (L:PRU), told Reuters that their firms were continuing to invest in commercial property outside London ahead of the June 23 referendum.
To be sure, investment in the entire UK commercial property market has cooled significantly. Property worth 16.1 billion pounds changed hands in the first four months of 2016, a far cry from 24.9 billion pounds a year earlier, according to Property Data Ltd.
Andrew Hawkins, director of capital markets at property consultant Jones Lang LaSalle, said he estimated up to a quarter of investors have postponed any deals until the result of the vote is known.
Some investors are also writing Brexit clauses into contracts that would give them the right to walk away in the event that Britain votes to leave the EU.
Despite this, the total value of regional commercial property deals in the first quarter, at 4.5 billion pounds ($6.5 billion), was 6 percent above the quarterly average for the last five years, according to commercial property broker Lambert Smith Hampton.
This contrasts sharply with London, where the value of deals was 15 percent below the five-year average.
"We are quite actively investing in the UK, but in smaller and more regional assets that will be less impacted - if at all - by Brexit," said Rob Wilkinson, chief executive of property investment manager AEW Europe.
'SITTING ON THEIR HANDS'
Compared with a year earlier, the number of commercial property deals in both London and the regions has fallen.
But the reduction has been more pronounced in the capital: a 31 percent drop, to 171 deals, versus a 21 percent decline in the UK regions, where 552 deals were recorded in the first five months of 2016, according to Property Data.
Many large institutional investors and funds, able to pay high premiums to secure property deals, have been absent from the regions. This has opened the door for firms such as Regional REIT Ltd (L:RGLR), which recently made offers on two office premises.
"The uncertainty around the upcoming EU referendum has many would-be buyers sitting on their hands," said Stephen Inglis, property director for London & Scottish Investments Ltd, asset manager to Regional REIT.
"We're seeing a softening of prices on properties up for sale in the regional office market."
Data also supports the theory that prices have fallen in regional markets. Average prime yields on provincial offices rose 25 basis points in March, data from real estate broker Savills Plc (L:SVS) shows. A higher yield indicates higher perceived risks associated with a purchase and generally translates to a lower deal price as buyers pay less to offset the risk.
Private real estate fund manager Clearbell Capital LLP, meanwhile, snapped up an office complex in central England for 25 percent less than it had originally bid after an international investor that had won the tender backed out of the deal, founding partner Manish Chande said.
($1 = 0.6914 pounds)