London tops commercial property investors’ list
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London has become the destination of choice for commercial property investors from Asia, the Middle East and the US – and this trend shows few signs of waning.
In 2013, there has been a series of high-value deals in central London by overseas investors, including the £260m purchase of the Lord Rogers-designed Lloyd’s building by Ping An, the Chinese life assurer, in July.
Other notable deals have included the Kuwaiti government’s £385m acquisition of Bank of America’s European headquarters in Canary Wharf and the Malaysian pension fund Kumpulan Wang Persaraan’s purchase of a City office block for £215m.
“London continues to lead the UK’s recovery,” says Liz Peace, chief executive of the British Property Federation (BFP), a trade body. “London’s credentials as a safe haven for investment means that there is still strong demand from overseas.”
The surge of interest in the capital is being driven largely by its perceived status as a so-called “haven” investment. Cash-rich investors have turned to London property as they seek stable income at a time when returns from cash and bonds have fallen. City of London real estate yields are about 4.75 per cent, while yields in the West End of London are about 4.25 per cent, according to DTZ, the property group.
However, there are other factors at play. London remains cheap, particularly in the eyes of overseas investors that have seen their currencies strengthen against the pound.
According to the IPD, the property value benchmarking company, in the two years from mid-2007, capital values fell by 41 per cent and 45 per cent in the West End and City of London office markets, respectively. In the following four years, values surged 55 per cent and 38 per cent, respectively.
“We had a situation where markets went into free fall around the UK in 2008,” says Colin Wilson, head of UK and Ireland at DTZ. “But very quickly in 2009, the London market hit a point of repricing that became very attractive to a lot of investors, both opportunistic and those looking for wealth preservation.”
The weakness of sterling has particularly helped Asian buyers. Other factors such as the UK’s transparent property ownership laws, the liquidity of the market, the language and political security have helped make London one of the most attractive – if not the most attractive – property markets in the world.
The level of appetite from overseas buyers is significant. International buyers accounted for three-quarters of the total £5.5bn commercial transactions across central London in the first half of the year, according to research from BNP Paribas Real Estate.
Investment into London’s West End office market rose to £5.1bn in the year to June 2013, up 68 per cent on the previous year, according to IPD. The property value benchmarking group estimates that international buyers accounted for 67 per cent of the total investment.
Despite this, there has been little indication that appetites are diminishing. “While there are signs that central London and particularly the West End are fully priced, interest from private equity and sovereign wealth funds looking to invest in central London remains significant,” says the BPF’s Ms Peace.
The central London occupier market is also improving, driven by business confidence and a shortage of supply. Emma Crawford, head of West End and midtown leasing at CBRE, says central London leasing activity saw a strong rebound in the second quarter of this year, momentum that has continued into the third quarter.
“This represents the first time since 2010 that leasing levels have been above trend for two successive quarters. In many markets, this trend has translated through to rental growth,” explains Ms Crawford.
This article is part of a Special Report series
Phil Tily, executive director at IPD, believes strong demand in London has helped protect the market’s value. “London’s relatively buoyant economy has kept demand for office and retail space strong, giving investors confidence to take on assets that they are relatively sure they can let. Despite yields compressing to post-downturn levels, investment has continued.”
The attraction of London’s real estate market is in contrast to the performance of the rest of the UK. Property outside London continues to struggle despite prices being as much as 40 per cent below their pre-crisis peaks.
However, some property commentators believe the fortunes of the regions are beginning to turn. Capital values rose 0.4 per cent in the second quarter of the year, halting an 18-month decline in which average values have fallen 3.5 per cent since September 2011.
“There is no doubt that London’s property market has seen a significantly greater flow of investment, occupier demand and amount of development compared with the rest of the UK,” says Ms Peace. “Given how expensive London is becoming however there is increasing interest in investing in the regions, where yields can be significantly higher.”
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