Salient to Investors:
Asian investors are the biggest buyers of office property in the City of London in 2012. A weak pound, safe haven reputation, and returns that beat financing costs makes London the world’s most attractive city for foreign property investment. Development is slower than demand, prices are 25 percent below 2007 levels and strengthening Asian currencies make London properties more affordable. National funds from Asia are increasing their proportion of investments in real estate and looking overseas for higher yields amid slower growth in the region.
Goodwin Gaw at Gaw Capital Partners likes London for pure diversification, flight to safety, and some yield – an income stability play versus the capital appreciation play that’s Asia. Gaw said he can borrow in the UK at 4 percent to get a cap rate of 6 – 7 percent or more – cannot get this size of spread in New York or Hong Kong.
Alan Carter at Investec said a 5.5 percent yield and increasing rents are attractive – Canary Wharf has replaced the City as London’s most volatile property market. Carter said the Japanese bought shedloads of property in 1988 and 1989 at very fancy prices and cut their losses after values began rebounding in 1993 and 1994.
Peter Damesick at CBRE said Japanese buyers in the late 1980s and early 1990s coincided with a record level of development and a recessionary drop in demand.
British buyers dropped to 20 percent of the market in the first nine months of 2012 versus 37 percent in 2011. Jones Lang say US buyers, the biggest group in 2010, made up 19 percent. Japanese owners cut their City holdings to 2 percent in 2005 from 11 percent in 1995. Knight Frank said that currency appreciation means an investor from Singapore can now buy for half the 2007 cost versus 23 percent lower for a UK buyer.
Office buildings in the City have risen 35 percent in the three years through September versus a doubling of Hong Kong office prices.
Andy Smith at PricewaterhouseCoopers said non-residents don’t get taxed on the sale of UK real estate.
Colin Lizieri at Cambridge University said the City’s attractiveness should be weighed against its boom-and-bust history and values that have fallen by half after inflation since 1980. Lizieri said City offices have performed appallingly and overseas buyers own most of them.
Peter Rees at the City of London said banks tend to increase their property-development investment at the peak of economic cycles. Rees said new buyers could end the City’s boom-and-bust cycle because it’s more likely their investment is long-term and not speculative.
IPD said values in the City may have peaked – income-producing City office buildings rose 1.3 percent through September. City office values have fallen 26 percent since September 2007 versus a 15 percent decline in the West End and Midtown, while capital values in the City increased 25 percent in the 5 years through Q3 2007.
Song Hong Sun at Korea Capital Market Institute said South Korean investors are turning to long-term overseas investments like property because it’s hard to get high returns at home, as aging becomes the biggest concern in Korean society.
Hiroyuki Arimura at Mitsubishi Estate said the City is one of the most globally attractive for investors because of its transparency, strong fundamentals, limited speculative development, and ongoing demand for the highest quality designed buildings.
Mohd Bakke Salleh at Sime Darby said London is the safest place on earth with UK’s legal system and transparent market.
Harm Meijer at JPMorgan sees compound annual growth rates in the City of 0.5 percent for the next 5 years, an eighth as much as London’s West End.