London is likely to see an influx of Japanese investment into its office market as yen buyers benefit most from sterling’s weakness compared to other international investors, according to the latest research from Knight Frank.
The firm’s analysis of the Central London office market reveals significant currency discounts for global investors over time.
Compared to the previous market peak in 2015, Japan has the biggest discount on the West End office market, with Japanese investors paying 31.2% less in Q4 2018.
In 2018 Japanese investors spent £222 mln (€258.7 mln) on Central London assets, with major deals including the £154 mln acquisition of First Avenue House on High Holborn by a Japanese private client of Sumitomo Mitsui Trust Bank. The deal was the sixth largest private purchase in London last year.
Edward Fairweather of Knight Frank’s Central London Capital Markets team who specialises in Japanese cross-border investment, said Central London remains a compelling destination for long-term investment, with the value of the pound providing a strong incentive for international investors in 2019. ‘Japan is in a leading position relative to other nations, and we expect to see Japanese interest in the London market translate into higher investment activity in 2019,’ he noted.
‘Japanese investors are now expanding their Central London appetite into a wider range of sectors in 2019, including hotel, logistics and residential as they look to diversify out of Japan. Investors can expect discounts of up to a third on 2015 values for West End offices, which combined with Japan’s ongoing programme to diversify its public purse, means London is very well placed for significant investment in 2019,’ he said.
He added: ‘Overseas investment volumes into London continue to exceed expectations, despite the uncertainty around Brexit. London remains the number one global recipient of foreign direct investment in to commercial property, outperforming Manhattan, Paris and Tokyo.’
Faisal Durrani, associate of Central London research at Knight Frank, said European investors appear to be capitalising on the weakness of sterling as well, with £2.55 bn committed in 2018, the third highest level from Europe ever recorded. ‘This underscores the depth of London’s appeal. Even Norway’s sovereign wealth fund, already one of the largest property investors in the UK, has announced plans to further deepen its UK commitments with a 30-year investment horizon,’ he said.
‘Investors from the EU stand to benefit significantly from the weak pound, with a 27.8% discount for Euro buyers compared to Q1 2015, Durrani said. Germany was the fifth biggest investor in the Central London office market in 2018, spending £682 mln, while Spanish buyers spent £591 mln on Central London assets, according to Knight Frank.
Meanwhile, Thailand’s stronger Baht could also drive an increase in activity by Thai buyers, with a 26.2% discount on West End property, the firm said.
