London real estate not a bubble about to burst, CREFC conference hears

London’s commercial real estate market is not a bubble about to burst, because its strength is underpinned by strong fundamentals, was the consensus view at the recent spring conference organised by the Commercial Real Estate Finance Council (CREFC) in London.

‘There is a lot of equity, a real wall of money focused on London, and there is a chance that it could push yields lower,’ said Stephen Pearson, senior director of Central London Capital Markets for CBRE. ‘But even if yields come down, London is so far ahead that it would take a long time for any change to affect it. If and when Europe recovers strongly, then money from the US and Asia might look elsewhere, but we are definitely not there yet.’

London’s multiple attractions, from its location to its time zone, from the language factor to the transparency and accessibility of the market, are enough to ensure that commercial real estate will continue to thrive even in a more competitive environment than the current one.

Asian investors are the most likely to drive prices higher in the next few years, experts said. ‘Chinese pension funds traditionally have invested 1% in real estate, but the re-allocation underway will increase that to between 20 and 30%, with a massive potential effect, and London is one of the obvious destinations,’ said Richard Croft, CEO of M7 Real Estate.

Japanese potential
Another potential game-changer is Japan, said Pearson: ‘The Japanese state pension fund (Government Pension Fund of Japan) is the largest in the world and has no exposure whatsoever to real estate as yet, but they are now sniffing around London.’ US investors, riding on the back of the strong dollar, will also continue to want to invest in sterling assets, said Tom Rowley, director of Angelo, Gordon & Co: ‘The US remains the capital engine, with investors ready to pounce because at the deal coalface you have to act quickly.’

The strength of London is and will continue to be ‘local supply and global demand’, according to Gerard Lyons, chief economic adviser to the Mayor of London. The city, with a population of 8.6 million and growing at a rate of 100,000 a year, ‘will benefit from the global urbanisation trend. In 20 years’ time, few cities in the West will be drivers of growth but London will be one of them'. As the recovery gathers pace and many predict that in a few years the UK economy will overtake Germany’s as the biggest in Europe, it must be remembered that London represents one-third of the UK's economic growth.

Election jitters
Despite this broadly positive outlook for the British capital, the next few weeks and months could be a bumpy ride as the UK approaches election day on 7 May. Each possible outcome has potentially negative consequences for the real estate sector. If the Conservatives win there will be an ‘in-out’ referendum on continued membership of the EU, and the prospect of Brexit is already spooking the markets. If the Labour party wins, there could be a negative reaction from business as well as the threat of higher taxes on property. If no party wins an overall majority, which as polls stand now seems the most likely option, the UK faces weeks if not months of uncertainty and political instability.