To say it’s a time of uncertainty in the UK may be an understatement. While the Brexit debate rages, London continues to do business.
London has long been an attractive option for Middle Eastern investors. Investment into the capital was expected to top 1.38 billion pounds ($1.75 billion) by end 2018, up 30 percent on last year’s activity, according to Savills.
London’s development industry is also confident. Our industry survey - the London Development Barometer (LDB), which quizzed housebuilders, REITs, local authorities - found that 51 per cent predict an increase or no change in inward investment levels over the next five years.
Whilst the Middle East will maintain its status as a key player in the capital, industry figures believe it will be Asia that will lead the way. and 80 per cent believe the majority of investment will come from there in the next five years, while 12 per cent said the same of the Middle East.
That doesn’t come as a huge surprise given its commercial investment in recent years. It remained strong at £7.3 billion pounds between first and third quarters of last year, with Singaporean and South Korean investments accelerating significantly. The largest transaction of the year saw The National Pension Service of Korea acquire Goldman Sachs’ new HQ for 1.16 billion pounds, reflecting a net initial yield of 4.1 per cent. A project of ours, 5 Broadgate, was also sold by British Land and GIC for 1 billion pounds to Hong Kong’s CK Asset Holdings.
But it’s not just Asia that has asserted its financial might. A recent Cushman & Wakefield report again ranked London as the world’s most popular city for global real estate investment, and that’s been the case for nine of the last ten years.
London saw a 22 per cent year-on-year rise in inward investment leading up to the second quarter of 2018. Not bad for a capital in the process of negotiating its departure from the European Union. While there’s no getting away from the fact that London’s position on the podium is being challenged, it must also be said that the risks do not translate into a substantial threat to the underlying fundamentals that make it so attractive. The end of 2018 saw the UK again crowned by “Forbes” as the best place to do business, much of which takes place in the capital. Despite its exposure to the supposedly Brexit-challenged financial services, central London office investment volumes were 7 per cent above the 10-year average, while London City office investment volumes were 30 per cent above the 10-year average.
At 8 billion pounds, that’s the highest it’s been since 2006. It’s clear that investor appetite is still rampant.
It’s in the residential arena where Brexit uncertainty is perhaps most strongly felt. There are generally gloomy expectations for the sales market as buyers and sellers sit tight; Cluttons has predicted as much as a 10 per cent fall in average house prices and our survey told a similar story, with less than half predicting an increase in demand.
This market softening isn’t bad news from a Middle Eastern investment perspective, especially when accounted for alongside a strong dollar and a weak sterling. Cluttons has claimed the “discount” for dollar-based buyers, which covers most Gulf states, stood at around 29 per cent for London residential property when compared to the market peak in Q3-2007.
It’s a healthy price advantage that doesn’t come around all too often; it’s a case of when and not if in terms of price stabilisation.
The residential market is undergoing a cultural shift in the UK too. Despite continued government support for home ownership, the UK is moving away from its historical obsession with it as the rental revolution emerges; 84 per cent of our survey respondents predicted an increase in demand for build-to-rent products (BTR) over the next five years.
The government has also thrown its financial weight behind the sector and institutional investment is pouring in. London’s rental population is set to rise to 40 per cent by 2028 and there are over 25,000 BTR homes either built or under construction in London alone, with that figure at 130,000 nationally.
Savvy investors may choose to consider Senior Living too. 85 per cent of our survey respondents predicting an increase in demand over the next five years, whilse Knight Frank has claimed it could become a 44 billion pound industry by the end of that period. Similarly with BTR, its increasing maturity is set to become a highly attractive option.
Whether it’s emerging asset classes or the more established commercial safe havens, investment opportunities in London continue to be sought after from overseas.
Gavin Kieran is Director, M3 Consulting.