By Tom Leahy on December 20th, 2016
The six months since the U.K.’s E.U. referendum have amply demonstrated how politics can have an immediate impact on commercial real estate markets. Central London investment volumes are down 55% versus the same period last year and the RCA/PD UK CPPI Central London office price index is down 8% since Q1’16.
However, the world’s fourth largest commercial real estate market has continued to attract new capital from a diverse set of buyers, and overseas investors remain the majority players in the market. In fact, almost 60% of the £5.3b ($6.6b) invested in Central London property since June has been from a mix of private and public overseas investors, more than three times the long-term average.
Many of these are newcomers to the market. Of the 49 Central London property buyers in Q3 and Q4, 17 hadn’t invested in the city previously. The majority of the new entrants are from Hong Kong, with others from China, Malaysia, Singapore, Qatar, Thailand and the U.S.
There are few real estate markets in the world where new investors would be queueing up to access stock following the emergence of a major downside risk. The liquidity benefits of these new buyers to current market participants cannot be overstated, especially for the U.K. funds that had to raise capital quickly following a blitz of redemptions after June 23.
Clearly, the currency markets have had a major influence here. For the buyers from Hong Kong − taking into account a 15% appreciation in the Hong Kong dollar versus the pound and the 8% fall in Central London office prices since Q1’16 − they are purchasing assets at early 2015 levels.
However, given the opportunistic nature of these purchases, it is valid to ask whether this can be sustained. The average European holdings of the players who have come into the market is less than €100m ($104m), and while some have much bigger portfolios in Asia, they represent a different set of buyers to the mix of large institutional and REIT investors who typically form the majority of the market.
Indeed, the larger REITs and institutions are, for now, keeping a low profile, with few acquisitions since mid-year. Much of this reticence is associated with expectations around pricing over the next 12-18 months. The share prices of London-focused REITs British Land and Land Securities have fallen by 25-30% since August 2015, providing an indication of where the direct market could be headed.
RCA data also shows sale prices have dropped below asking prices for sold assets in London. The recent sale of the CityPoint tower to Brookfield for a price 15% below its pre-June valuation is a good example of this. For substantial price declines to be logged, the market might need to see more forced sales like the CityPoint deal. But with only one of the U.K. retail funds still closed and almost no financial distress, there is little likelihood of many more completing.
Therefore lower transaction volumes could be the chief symptom of this protracted period of uncertainty, as occupiers and owners wait for Article 50 negotiations to begin in earnest and the shape of the U.K.’s future relationship with the EU becomes known. In the meantime, the pound’s weakness will act as an incentive for some opportunistic overseas buyers to continue to acquire London real estate on a piecemeal basis.