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Mideast investors push ahead for London assets

Spike in interest for £100m plus commercial and residential assets, says fund manager

Gulf News

Dubai: Wealthy Middle East investors seem to be doubling down on their favourite overseas real estate destination — London.

“We are seeing an increase in enquiries from ME investors for large ticket [plus £100 million [Dh454.8 million]] prime office and residential assets in the London area,” said Jonathan Lourie, CEO of Cheyne Capital, which operates real estate focused funds and currently tapping investors for two of its latest ones for a combined £800 million.

“There is a very strong expectation that lease demand for London offices will reduce substantially in light of Brexit. Though this may be true for some sub-markets in the London office market, it does not hold across all of London in general.

“The Canary Wharf market, with its large concentration of financial services occupiers is probably the most exposed to lease demand declines. If you look at the mid-town and West End markets [dominated by media, technology, insurance, biotechnology, etc], you see a dynamic of limited supply and stable demand.

“Rather than a cliff-edge fall in demand for space, we see a lengthening in the time an occupier takes to make leasing decisions and the incentives they require as the key risk post-Brexit.”

For investors seeking longer term value rather than trophy assets, London offers a lot to pick and choose from these days. There have been declines in value for offices after Brexit. “It is important to note that the current bid prices for value-add London offices are already reflecting a very harsh post-Brexit scenario for rents and demand,” said Lourie.

Asset exposures

As for prime residential properties in London, Cheyne is picking its way selectively.

Instead of putting in direct equity into real estate assets, Cheyne takes exposures in the financial instruments related to those. This could take the form of bonds, senior or mezzanine debt, whole loans and even “special situations”, which essentially relate to asset exposures that are under stress.

With London property values and demand patterns volatile, traditional lenders may be a trifle reluctant to take such exposures. And that is where Cheyne sees opportunities.

“After Brexit, the sweet spot has been senior lending, and buying CMBS (commercial mortgage backed securities),” said Ravi Stickney, who heads the fund manager’s real estate business. “Brexit has already impacted asset values, they were falling before and lending is being even more curtailed.

“Immediately we are already seeing some stressed recapitalisations, borrowers coming to us with great assets who are under stress because recapitalising has become more difficult.

“Values are falling for City offices and we’re picking up controlling pieces like we did in the 2009-12 period. We buy bonds that are at an attractive level and have control rights that enable us to influence the outcome. We have a seat at the table and we look to work towards a consensual solution.”

 

Factbox: Key German cities are at their price peaks

* Going bargain hunting in German real estate? It depends on what you want to pick up in a marketplace touted as the next best option in Europe by some.

According to Jonathan Lourie of Cheyne Capital, “Core income assets in Frankfurt and Berlin are at the top of the value cycle and driven by strong demand from yield hungry investors in a low rate environment.

“There are bargains to be had in Germany — we believe that these are available via the distressed/non-performing loan route. German institutional investors, whilst attracted to core income, are averse to investing in troubled debt situations.

“Hence, the dislocation between assets procured through a debt situation and via an asset auction can be significant.”

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