KKR's Rosenberg Says London Property Prices Could Fall 10%

(Bloomberg) -- The value of high-quality properties in London could fall by as much as 10 percent as the U.K.’s decision to leave the European Union affects the economy, said Ralph Rosenberg, head of real estate for KKR & Co.

“I wouldn’t be surprised to see London reprice” about 5 percent to 10 percent “for core-type assets” because Britain’s planned exit from the EU isn’t fully reflected in real estate values, Rosenberg said in a Bloomberg Television interview Wednesday. He was referring to both commercial and residential property. Prices for the best London real estate surged right after last year’s vote as outside investors took advantage of the decline in the pound to buy.

Commercial property in the U.K. capital is in flux, with the value of office buildings in the main financial district rising even as rents fall. By comparison, assets with a risk of vacancy or that require development have declined in value as investors avoid riskier properties following the Brexit vote. Prime London office values may fall as much as 20 percent this year, Deutsche Bank AG’s asset-management unit said in March.

In the U.S., supply and demand in commercial real estate are generally in “equilibrium,” Rosenberg said. There are investment opportunities where the dynamic isn’t in balance, such as New York luxury condominiums and hotels, he said. The latter has been hurt by excess supply and lower international inbound demand because of the strong dollar.

High-end apartments in U.S. downtowns are at risk of oversupply, Rosenberg said. By contrast, rentals for middle-income and lower-income tenants and student housing continue to see “tailwinds,” he said.

Brick-and-mortar retail isn’t going away, said Rosenberg, whose firm has invested in shopping malls in places including Illinois and Kansas.

Chinese Clampdown

Global demand for real estate remains strong despite a Chinese clampdown on risk-taking, Rosenberg said. Investors from South Korea and elsewhere, including U.S. pension funds and sovereign wealth funds, are actively bidding for assets, he said. The reduction of Chinese capital has taken away the “outlier bid” for trophy properties in gateway cities such as New York and London.

KKR on Monday named Scott Nuttall and Joe Bae as co-presidents and co-chief operating officers, to likely succeed founders Henry Kravis and George Roberts, who will now focus on strategic issues, relationship-building and mentoring. The change won’t affect the way the firm does business, Rosenberg said.

KKR’s real estate division has invested or committed about $4 billion globally in more than 60 transactions, according to the firm. Rosenberg said he oversees about 55 people.

To contact the reporters on this story: Hui-yong Yu in Seattle at hyu@bloomberg.net, Erik Schatzker in New York at eschatzker@bloomberg.net.

To contact the editors responsible for this story: Daniel Taub at dtaub@bloomberg.net, Neil Callanan