Global capital shows its commitment to London
International investors remain focused on the UK, demonstrating their commitment to London, in a show of confidence in the market.
A depreciation in sterling and post-vote yield convergence means UK relative pricing remains favourable compared with the Eurozone, while demand has also been bolstered by strong occupational market fundamentals and political stability.
JLL forecasts that UK real estate investment in 2018 will reach around £55 billion in capital commitments. The first quarter already saw several landmark investments, including Korean investor Mirae Asset Financial Group’s £340 million purchase of prime office investment in the City of London, 20 Old Bailey, following their acquisition of Cannon Bridge House.
Despite initial concerns, investors are betting that Britain’s exit from the EU won’t hurt the market in the long run, with London’s robust market in particular proving a draw for a diverse range of international capital, says Alistair Meadows, Head of UK Capital Markets at JLL.
According to a recent Brexit report by JLL, investors have already priced in Brexit and after a muted 2016, the market bounced back in 2017. Investors have dropped their ‘wait and see’ approach and a flurry of deals through the year pushed London into top place for global real estate investment.
“We continue to see a diverse range of capital, both domestic and international, with appetite to invest in the UK,” says Meadows. “That ranges from Canadian and Korean pension funds, European and Asian insurance companies, global sovereign wealth funds, and in particular U.S. private equity real estate funds.”
Demand is being driven by sound underlying occupational markets and the fundamentals associated with supply and demand; very low vacancy rates, constrained supply, and resilient demand.
Meadows says that 2017 saw an uplift in transactional activity of around 30 percent with over £60 billion of capital committed to the UK. “Office and industrial in particular remain very strong, and there is also a growing appetite from investors for alternative sectors,” he said.
Landmark deals in 2017 included the £1.3 billion acquisition of 20 Fenchurch Street, the ‘Walkie Talkie’ building by Hong Kong conglomerate Lee Kum Kee, and Hong Kong-listed CC Land’s £1.15 billion deal for The Leadenhall Building, also the capital’s ‘Cheesegrater’ tower.
In addition, Deutsche Bank AG’s asset management arm purchased two London office buildings from M&G Real Estate for £310 million, and the Qatari royal family’s private property company, Alduwaliya, purchased Ofcom headquarters Riverside House for £150 million.
“In London, over 80 percent of transactions in central London offices were undertaken by international investors, led by Hong Kong/Chinese investors with over 35 percent of market share, then Middle Eastern and German investors in second and third place respectively,” says Julian Sandbach, Head of London Capital Markets, JLL.
“Investors looked to the UK through the course of last year with confidence, buoyed by advantageous exchange rate relativities and low global finance rates; Despite the geo-political volatility, there’s still a conviction that the UK is a good destination long term real estate investors.”
The economic uncertainty that surrounds the EU negotiations is not helpful, but quantifiable, becoming just one of the many challenges facing investors over the next five years, not least interest rate renormalisation.
The impact of Brexit on the City’s large financial sector remains a factor, though so far evidence of change is limited, and London recorded the strongest financial sector take-up of any European hub last year. Despite some inevitable relocations, London remains an undersupplied office market with take up of office space in 2017 significantly above the 10-year average.
“Confidence from major global occupiers willing to cement long term commitments to London given investors confidence in the Capital’s continued place as a global hub, framed by a burgeoning technology sector which continues to attracting significant talent,” says Sandbach.
However, JLL warns that the UK could exit with no deal in 2021 if talks collapse, and this remains a risk to the outlook.