CENTRAL London looks set to be the prime beneficiary of a renewed appetite for direct investment into UK commercial property. The capital already tops the league table of largest global property investment markets, netting close on £11bn in 2010, significantly more than closest rivals Tokyo, Paris and New York. And the prospects for 2011 bode well: over £6bn of transactions have been closed in the first half of the year, with expectations that the second will be equally, if not more, productive.
Although it accounts for around one-third of the total invested into UK property, London soaks up virtually all of the cash coming from foreign investors. “It’s a real magnet for overseas capital,” confirms Ross Owen, head of investment and fund management at property consultant Cluttons, who is one of many investment specialists pleasantly surprised by the sheer spread of nationalities vying for a stake in London real estate.
Whereas previous investment waves have been dominated by a single nation – Germany and the US have led charges in the past – the current spike can be characterised by the diversity of investors’ origins, with around 40 nationalities currently pitching into the fray. The reasons for London’s attraction are many. “The weakness of sterling undoubtedly helps,” says Owen, “as it means investors are effectively buying at 20-30 per cent discount.”
Also a draw is an expectation of office rental growth before the recession-induced supply gap closes (see pp.22-23) as well as the UK’s owner-orientated lease structure, which still presents top covenants on 15 year leases, compared to just three years across Asia. “Of 12 global cities, London is the only one to offer long-term secure income streams,” says Chris Brett, head of office capital markets at global property adviser Jones Lang LaSalle.
In an uncertain world, that security is an increasingly valuable commodity. “It’s not just about property fundamentals for these investors, it’s also about wealth protection,” points out Clive Bull, head of central London investment at property firm Cushman & Wakefield. With its relative economic and political stability and extreme liquidity, London is viewed as a definite safe haven, especially by Far Eastern investors, who this year look set, for the first time, to invest more than their Middle Eastern counterparts.
High net worth individuals, buying lot sizes of £30-50m, are targeting high quality retail opportunities, while private funds and institutions are looking for grade A office buildings, let to top covenants on long leases, with £100m-plus price tags.
Although direct investment from China is currently still impossible, Chinese capital is beginning to seep into UK property through partnerships, like the high profile participation of Chengdong Investment Corporation in Songbird Estates, owner of Canary Wharf Group, and joint developer of new City office development 20 Fenchurch Street, EC3, better known as the Walkie Talkie.
Recent transactions by overseas purchasers include offices at 63 St Mary Axe, EC2, bought in March by Korean pension fund NPS for £27m; Aviva Tower, EC3, bought in April by a private Indonesian investor for £288m; and Goldman Sachs’s European HQ at River Court, EC4, bought by Hong Kong-based Chinese Estates in January for £280m. The landmark Adelphi building on the Strand, WC2, is understood to be currently under offer to US investor Perella Weinberg for £260m.