The commercial property market is booming. Annual investment in UK property hit £42bn in the first quarter of 2014, the highest level seen since the height of the last peak in late 2007, according to figures from Real Capital Analytics, a research firm.
A number of factors are behind this, not least the fact that investors seem besotted for now with London property. The low interest rate environment created by quantitative easing coupled with low returns on both equities and bonds has seen investors scramble to find new sources of yield. Property looks like a good bet – and the UK is politically stable, its economy is recovering and its capital, London, is a truly global city. As a result, internationally mobile capital is pouring in.
Sovereign wealth funds are battling institutional investors, such as pension funds and insurance companies, for the capital’s commercial property, driving prices ever higher.
Asset prices are up 11 per cent year on year, according to Real Capital Analytics/Property Data, while yields have been falling sharply.
More than three-quarters of the money spent in the London market in the first three months of this year came from international buyers, according to figures from Cushman & Wakefield.
But even with the buoyant market, a handful of purchases have stood out.
The Indian property company Lodha’s £300m purchase last year of the Canadian embassy building on Grosvenor Square, and Chinese developer Greenland’s acquisition of the Ram Brewery site in Wandsworth, south London, for £600m both raised eyebrows among seasoned property watchers.
At the turn of the year, two record-breaking transactions took place which further exemplified the trend: Singaporean sovereign wealth fund GIC bought a 50 per cent stake in the Broadgate office complex for £1.7bn; and Kuwaiti property company St Martins spent a similar amount to acquire the More London estate. Both were record-breaking prices for the London market.
We seem to be in the middle of a sellers’ market.
Indeed, some of Britain’s most experienced property investors are seizing the moment to shed assets and free up cash. The big listed companies – real estate investment trusts such as British Land and Land Securities – have shifted to become net sellers in the past six to 12 months, for the first time since 2009.
So is it a case of buyer beware? When the locals are selling for very healthy profits, is it time to exercise more caution? Less experienced buyers coupled with more experienced sellers are, in any investment market, generally a good sign that a certain point in the asset pricing cycle has been reached. The question being asked now, is whether the market has reached its peak – or has further to go.
Are buyers being driven into making overly optimistic bids by the weight of money in their pocket? The renewed rhetoric from analysts with very short memories that “the only way is up” only adds to the property fever.
Arguments such as “this is the new normal” always give cause for concern.
There is, however, a way to explain why companies are still in the market to buy.
First, they evaluate investment performance over much longer timescales than most domestic investors. An institutional investor is looking for long-term, stable, ideally inflation-linked returns that most closely match their liabilities – and these could stretch for 40 years or more.
A building whose price is based on a 10- or 15-year returns model can look cheap to a buyer with a 40-year perspective.
Second, there is the currency aspect. The devaluation of sterling since the global economic crisis has not only seen British exports become more competitive – it has also made British property cheaper. Buyers whose investment model is priced in Singapore or Hong Kong dollars, for example, have found even iconic London trophy assets surprisingly affordable.
And finally, on the question of sustainability: as the middle classes in the emerging markets continue to grow, the weight of savings in their home markets is likely to continue to spill out across the globe in search of investment opportunities.
What implications does this have for demand?
Last year, China doubled the proportion of international investment it permits to be placed in property – but that still only represents 2 per cent of the total. That figure alone suggests that the tidal wave of cash flowing into property assets around the globe is unlikely to recede in the coming years.