LONDON'S commercial properties continue to attract strong and diverse interest from abroad despite the internal and external challenges, with the sterling trading at one of its lowest rates in eight years, BNP ParibasReal Estate says.
“Seventy-seven per cent of Central London investments in the first quarter of 2013 (came) from overseas money,” BNP says in a release.
Europeans (outside of UK) accounted for 27% of overseas investments into Central London, followed by North Americans (25%), the Middle East 18% and the Far East (17%).
“Positively, total investment into the Central London property market rose 9% to £2.91bil (RM13.38bil) in the first quarter of 2013, compared with quarter four 2012,” a BNP release says.
Central London comprises the submarkets of the City, Midtown, Docklands and West End. The City refers to the square mile which houses London's financial district.
When analysing each submarket, investment into the City remained fairly stable in the first quarter of 2013 at £1.3bil (RM5.98bil) and the Docklands saw a rise in investment, with the largest deal being at 5 Canada Square.
At one time known as the Docklands, steel and glass offices dominate the skyline. Canary Wharf will be one of the beneficiaries of Crossrail, one of Britain's most significant infrastructure projects today since the Underground.
BNP Paribas Real Estate senior director of London investment, Richard Garside says: “Demand remains as diverse as ever with a continued high level of activity from overseas money driven by the focus on London as a safe haven with high quality investment stock. UK institutional investors also remain active within their traditional sectors and we are seeing a continued demand for annuity style income often provided by alternative sectors such as student housing, hotels, supermarkets and data centres.”
Why does London have such a strong attraction for foreign investment?
Chairman and CEO of Canary Wharf Group Sir George Iacobescu wrote in the Financial Times in March that the rule of law was central to London's safe haven status because investor could be sure that the legal system would safeguard properties under any political circumstances.
The same publication reported that 2012 saw £8.8bil buying into the London commercial sector, the highest volume since 2007. Knight Frank research says sovereign wealth funds accounted for about 25% of all transactions in the City market (or £2.4bil out of the £8.97bil).
CH Williams Talhar & Wong managing director Foo Gee Jen says it is necessary to look at the local office market situation in order to understand why Malaysian sovereign funds diversified abroad. Malaysian sovereign funds have invested about £3bil in London since 2009. He says yield for the Kuala Lumpur office market hovered between 7% and 7.5% from 2006 to 2011. Since last year, it has moved further down.
“Property value has moved up and the rental today does not correspond with the quality of the buildings. Yield is compressed. The same thing is happening in Hong Kong and Singapore. This has to be examined in relation to the 3% fixed deposit rates today. So when you get a yield of 4%, it seems reasonable, at 5% it is acceptable,” he says.
When sovereign funds buy into London, they enjoy a “double discount” in the form of lower entry point because prices dropped drastically in 2008/2009 and the pound is weak, says Foo.
The funds that have bought into London include Employees' Provident Fund, Permodalan Nasional Bhd, KWAP and Lembaga Tabung Haji.
Malaysian real estate investment trusts (REITs) also bought into the local commercial property market. Some development-based companies also converted their own assets into REITS. There are many prime office buildings, but the yield is not attractive.
Foo says buying abroad is a diversification for the Malaysian funds. Besides future capital appreciation and 5%-7% yield, Malaysian funds are attracted to long tenancies that go up 20 to 30 years.
The Financial Times reported on March 12 that the London office market and other European cities have attracted the attention of sovereign wealth funds from Asia of late. These funds are able to hold these assets for 30 years or more, if they so wish because their focus is on rental, not total return.
This fundamental difference in approach, combined with deep pockets means they can pay more and are in a position to outbid traditional landlords on many of the world's most coveted buildings, the Financial Times reported.
“From a Central London real estate perspective, sovereign wealth funds have been the driving force in pricing at the top end of the market and have become a key and distinctive purchaser type in the market. Sovereign wealth funds accounted for a quarter of City transactions,” the publication reported.
The build up in interest in London started in 2009/2010 while the local office market took a beating after 2008/2009. This does not mean there is no interest among funds in the local commercial sector. Pelaburan Hartanah Bhd (PHB) and Lembaga Tabung Haji have purchased local office buildings. - The Star
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