In the short term, there is no doubt that Brexit uncertainty is weighing on the UK and on the City of London, with the UK capital losing its crown to New York in the annual Global Financial Centres Index.
“Many commentators believe that the negotiations will be in the most part finalised in 2018, when we should have a much clearer investment horizon going forward,” says Julian Sandbach, Head of London Capital Markets at professional services firm JLL. “However, a no-deal Brexit will inevitably bring volatility to all markets, including commercial property.”
The appeal of the UK investment market
Putting the short term aside, Asian investors active in the UK are more interested in the longer-term perspective. They are attracted by yields for prime offices in the City at a stable 4.25 per cent, which compare favourably with the 12-month Libor rate hovering at one per cent.
The UK market also offers the benefits of transparency, good governance and a strong legal system, as well as historical and cultural ties with many Asian countries – one third of non-EU students in the UK last year, for example, were from China.
London – a magnet for global capital
Over 75% of capital invested in the London market this year will originate from overseas, predicts JLL, with a high proportion from Asia.
2017 was the year of the big Hong Kong and Chinese deals; namely the purchase of 20 Fenchurch Street (the Walkie Talkie building) by Lee Kum Kee (Hong Kong) for £1.3bn and the Leadenhall Building (the Cheesegrater) by CC Land (China) for £1.15bn.
The Hong Kong investors have since become more discerning, with a more measured and asset-specific approach. One factor behind this is the end – at least for now – of the opportunities offered by the post-Brexit referendum sterling crash against the US dollar, given that the Hong Kong dollar is pegged to the US dollar.
Korea and Singapore investors in the City of London
This year, it is the Korean and Singaporean investors making their mark. “While the volume of inbound Hong Kong capital has significantly reduced from the £6bn invested in 2017, the slack has been taken up by Korean and Singaporean investors,” says Julian Sandbach.
Korea’s National Pension Service is the name behind the biggest deal in the city so far in 2018, with the purchase of Plumtree Court in London EC4, Goldman Sach’s European HQ, in a £1.1bn sale-and-leaseback transaction, which marked the return of NPS to the UK market.
As Scott Kim, Head of Global Real Estate at National Pension Service, said: “[Plumtree Court] is one of the finest office buildings in London which will be let to an exceptional tenant for 25 years.” The building, designed by Kohn Pedersen Fox Associates, offers 826,008 sq feet (76,739 sq metres) of office space.
Asian investors look beyond London in the UK
Asian investors are now setting their sights beyond the prime office market in London, to diversify across different sectors and across the UK.
Birmingham, the UK’s second city, is of particular interest given the High Speed 2 rail link between London and Birmingham (due to open in 2026), leading to the tag of ‘Brumdon’. And Manchester, home to the UK’s third busiest airport with direct links to Asia, including daily flights to Beijing and Hong Kong.
Angus Minford, director in capital markets at JLL, explains: “Asian Investors are now becoming more prominent across the UK regional markets, focussing their attention around the core regional cities and strategic business park opportunities.”
One of the largest recent transactions outside London was the acquisition from Oaktree Capital Management at the end of last year by Singapore-based Frasers Property International of a portfolio of four UK business parks (in Reading, Basingstoke, Camberley and Glasgow) for £686m, as well as separate deal to buy the Maxis business park in Bracknell for £57m. More purchases outside London by Asian investors are expected to follow.
In the UK, not only are Asian investors looking beyond Brexit; they are also looking beyond London.