Mideast investors have reasons to retain trust in City

With office investment in 2017 in the City of London hitting £12.2 billion — doubling the 10-year annual average (£6.259 billion) and just behind the all-time record volume recorded in 2014 (£12.6 billion) — the market continues to prove itself as a leading destination for global capital.

Volumes were buoyed by investors from over 26 countries transacting in 2017 as non-domestic investors became more active than ever. Some of these overseas parties were drawn to the weakness in the sterling that has existed since the EU referendum, while others were attracted by the comparative risk compared to their own markets. And, also, by comparative returns as prime yields on London offices are higher than those in much of Europe and the Asia-Pacific.

Such is the demand for London real estate from global capital that we saw two record-breaking deals in the City during 2017, with CC Land Holdings ltd. acquiring The Leadenhall Building for £1.25 billon, closely followed by LKK Health Products Group paying a sum of £1.28 billion for 20 Fenchurch Street — the UK’s biggest ever deal for a single office building.

The result of these two deals saw Asian investors as a whole taking the lion’s share of all transactional activity in London with a 53 per cent market share, followed by European (15 per cent) and US (10 per cent). There was also notable activity by investors originating from the Middle East, who represented over 8 per cent of the market with deals including that by the Al Gurg Group acquiring 240 Blackfriars Road on London’s South Bank for £266 million; Alduwaliya Asset Management paying £150 million for Riverside House; and a private Middle Eastern investor paying £285 million for Lacon House.

Adding to this demand from overseas investors, in 2017 we have seen the return of UK buyers to the London market who, having paused for breath amid the uncertainty created around the referendum. They took a 12 per cent market share overall and signalled their long-term confidence in the ongoing safe haven London provides for capital.

There has been a lot of speculation following the announcement by the UK government in the Autumn Budget that a capital-gains tax on foreign buyers of commercial property will be introduced. Yet, while this creates an added layer of legislation that could be seen as a deterrent for overseas buyers, it is worth noting the government does not plan to introduce the tax until 2019 after a consultation period.

And it is anticipated that some investors may be exempted from the changes. Meanwhile, the yield differential between London offices and other global capital cities remains and we expect overseas investors, many of whom are looking to diversify capital and preserve wealth outside of their domestic markets, will continue to target the relative stability of the UK.

With regards to Middle Eastern investors in particular and activity in the City of London — and the wider central London market — we are likely to see a continued focus on income-producing quality assets prominently positioned in established office locations. Yet while the focus in London is on wealth preservation and long-term capital value appreciation, unlike some overseas investor groups, Middle Eastern buyers are already active in UK regional cities. And, comparatively, outside of London, their focus on long-term income at relatively high yields ... levels which are unobtainable in London.

However, as a final thought, it’s worth noting that London remains the most liquid real estate market in the world. Not only is it attractive to investors because of its resilient occupational markets (including a third of the city’s developments already being pre-let), it also offers a discount for some overseas parties, particularly those which dollar denominated, due to the fall in sterling.

The UK is perceived as the most welcoming market in Europe to overseas investors and the landlord-friendly leasing structures and market transparency make for an attractive marketplace that will continue to draw overseas interest. Even if investors are prepared to pay more to buy in France or Germany, language barriers can present problems, and for this reason we expect the strong levels of overseas capital targeting London to continue into 2018.

The writer is Director in the cross-border investment team at Savills.