COMMENT: With the City of London seeing near-record levels of commercial property investment, office take-up in the City and West End sitting above the long-term average and one-third of the city’s developments already prelet, London proved its resilience as a leading global office market in the year that’s just been, says Stephen Down, head of Savills’ central London investment team.
Hong Kong investors have taken the lion’s share of all commercial property investment in central London in the past 12 months (32.9%, £6.4bn) – despite more than 26 nationalities of investor transacting – lifted by two substantial deals: the Leadenhall Building and 20 Fenchurch Street, both EC3, which between them account for more than £2bn.
On average, in 2017 we saw three new Asian investors arrive in London every week looking to spend. While predominantly made up of parties from Hong Kong, this also included investors from mainland China and increasingly the Middle East, South Korea and Japan.
These investors, old and new, are drawn to the UK by the discount the fall in sterling creates and also by the comparative risk (or lack of) against other markets, and also by comparative returns, as prime yields on London offices, which are at 3-4% for good-quality buildings, are higher than those in much of Europe and Asia-Pacific.
Overall, Savills is actively tracking 331 overseas investors looking at London, some 240 of whom are from Asia.
In terms of what they are looking for, first-time buyers from Asia are seeking the security of core office assets in the City and West End prime markets, while the more experienced investors are starting to move up the risk curve.
CC Land is a prime example of this. It first acquired the Leadenhall Building, which has a weighted average unexpired lease term in excess of 10 years, then it later partnered with R&F to acquire a 10-acre development site at New Covent Garden, SW8.
Success in diversity
For a number of the clients we work with, real estate is not necessarily their core business. We have clients from Asia whose main businesses range from knitwear and denim garment manufacturing to palm oil and paper pulping.
The acquisition of 20 Fenchurch Street by LKK is another good example, as its core business is condiments. There tends to be great interest in these stories but in reality it is no different from Dyson or Cauldwell diversifying from vacuum cleaners and mobile phones into property.
The owners of these companies are seeking to diversify their wealth and typically they will have been making real estate investments in their home markets for some time and have just reached a point where they have such substantial real estate holdings that they want to diversify these too.
As such, we normally get to know them through the real estate business they are doing locally, as we have such a substantial business across Asia.
The conversation around investing overseas then either comes from them asking whether we can help or we may start showing them opportunities in other countries, particularly where we are selling assets that are similar to those they have bought in their home markets.
For some of our more widely marketed sales, we show them to huge databases of clients, many of whom have never told us that they want to invest overseas. But by seeing what is available in other markets they ask us for a more in-depth discussion and we see what we can do to help.
Overall, Savills was involved in 58.1% (£3.2bn) of all deals involving Asian buyers in central London in 2017 (£5.496bn in 31 transactions) and 26.5% (£545.3m transactions) of West End deals involving an Asian purchaser (£2bn in 21 transactions).
Our link with Hong Kong investors in particular is partly due to our established capital markets team in Hong Kong – in 2015 and 2016 we had dominant market shares in Hong Kong capital markets (58% and 56% respectively).
This makes us well placed to know and understand the most active buyers in the market when they decide they want to enter a new country to help navigate the challenges and opportunities that exist.
New restrictions
In August, the Chinese government announced new restrictions on the amount of capital leaving the country, of which much was facilitated through real estate investment. Despite much speculation on how this might impact London’s investment market, the restrictions aim to control volumes of outbound capital, rather than prevent them.
Investors from the China region, including Hong Kong, who had been particularly busy in the London market still remain active, albeit with an increasingly selective buying criteria.
This need for Chinese and Hong Kong buyers to be selective was heightened further following the announcement by the UK government in the Budget that a capital gains tax will be introduced on foreign buyers of commercial property.
Yet, while this creates an added layer of legislation that could be seen as a deterrent for Asian buyers, it is worth noting the government does not plan to introduce the tax until after a consultation period in 2019 and it is anticipated that some investors may be exempt.
Meanwhile, the yield differential between London offices and other global capital cities remains (prime yields in Hong Kong sit at 2.8% for Grade A offices) and we expect Asian investors, many of whom are looking to diversify capital and preserve wealth outside of their domestic markets, will continue to target the relative safe haven of the UK.
Why? Because London remains the most liquid real estate market in the world. Not only is it attractive to Asian investors because of our resilient occupational markets and the discount that the fall in sterling allows, but the UK is perceived as the most welcoming market in Europe to overseas investors. Our landlord-friendly leasing structures, English language and market transparency make for an attractive marketplace that will continue to draw overseas interest.
Even if investors are prepared to pay more to buy in France or Germany, language barriers can present problems and for this reason we expect the strong levels of Hong Kong and Asian capital targeting London to continue into 2018.
