Institutional investors are coming back to London

LREF 2018: Investment into London is likely to swing back to overseas institutional capital as European competitiveness slows and small investment teams look to allocate capital in single large transactions.

“If you went to an investment committee for an overseas sovereign investor in the aftermath of Brexit there is no way, reading headlines 3,000 miles away, it would say yes to London,” said Eastdil director Peter Coates.

Participants – what’s the deal with London investment?

Peter Coates, director, Eastdil Secured
Graham Reid, partner, Reed Smith
Savvas Savouri, chief economist and partner, Tosca Fund
Neil McLeod, head of central London, Aviva
Alisa Zotimova, chief executive officer, AZ Real Estate

“But two years of sustained leasing, investment, reduced development… institutional investors are now able to look at London with a track record in the face of adversity, and two years of looking at everywhere on the continent go beyond levels they are comfortable with.”

Despite high pricing, Brexit uncertainty and regional competitors, Coates was bullish about the capital’s prospects at the Money Talks roundtable at LREF 2018.

And he was not the only panellist singing its praises.

A shift?

Savvas Savouri, chief economist and partner at Toscafund, said London had done extremely well compared to how commentators had predicted in the wake of the EU referendum.

Savouri said an expected slowing in quantitative easing in the Eurozone – €2tn has been committed since March 2013 – would act in London’s favour.

He added that its cessation will stop fuelling the property boom in European markets that has made them a major competitor to London.

Coates said due to its relative performance there is starting to be a shift in the capital coming to London, from two years of private and high-net-worth cash to sovereign wealth funds and institutional buyers.

“The attraction of London is you can place a lot of money in large transactions,” he said, which will be important to the likes of Mapletree and GIC, which have deep pockets but very small teams.

This could also lead to movement in the listed sector, where the NAV discount to asset value is often well over 20%.

“The listed property world hasn’t yet seen the corporate activity it’s about to see,” said Savouri.

“Whether it’s someone taking a pot at Shaftesbury, GPE or any other with a large London presence.”

Coates said: “[For] these organisations that are light on human resources but have very deep pockets… [a take private] is not an easy thing, but it’s a logical next step isn’t it?

“If you need a best-in-class management team and ownership of assets in another country, you’ve got a ready-made package there. It’s a natural evolution of what’s happening at the moment, it’s just a very difficult thing to do.”

Part 2 – Have the floodgates from Hong Kong been closed?

Where that money will come from is another matter, and there was no consensus on whether investment from China and Hong Kong had dried up.

Savouri said anyone dismissing China is making a huge investment error, and that he also expected to see a number of Chinese occupiers making moves to the UK.

But Coates said that, at the moment, the Chinese money flooding into the market had ceased.

“The general trend of [Chinese] money is expected to be outbound, but my expectation is you will have blips along that road, it will not be a continuous theme. It will be gates closed, outflow, gates closed, outflow,” he said.

“I think the gates are closed at the moment,” he added.

Similarly, there were questions about whether the current stream of Korean investment would continue – being off the back of a currency play that has since dried up – and whether the long-mooted arrival of Japanese capital was any closer.

For Japan, Aviva’s head of central London Neil McLeod said there were “certainly conversations”.

“But they are being a lot more cautious than the other South East-Asian money, I think they will come but I think they will go to Europe first and come to the UK post-Brexit,” he added.

And UK cash?

But one thing agreed on was that UK-based money would not be high on the list of investors.

“It’s tough for us in London at the moment, the weight of capital is chasing for different reasons than we are,” said McLeod.

“We look at deploying money into assets we already own. For us it is reinvesting into existing assets rather than just competing for the biggest prize.”

Graham Reid, partner, Reed Smith, said that few bidders were from the UK.

“If you had core real estate on a 10 year lease, that was flying off the shelf, and if it was shorter it wasn’t,” he said.

“But all but two of the 20 plus bidders would be from the Far East.”

Savouri said Toscafund itself had not deployed any of its £1bn UK AUM in London.

“You can get yields in Manchester, Birmingham and Leeds you cannot get in London, it’s a no brainer… at the moment the gap is wide enough to be an open goal,” he said.

Nor is this regional shift restricted to UK-based investors.

Alisa Zotimova, chief executive officer of AZ Real Estate, which advises a number of Russian clients, said: “Those investors who have really set their minds on the UK, are sticking to their guns… and most of the people don’t want to be in central London.”

She said despite stereotypes of Russian overspending “the last few deal have been done outside of London… they are very shrewd”.