UK real estate appears to be back in vogue with international investors and deal volumes on the rise again despite the public's vote in June 2016 in favour of Brexit. UK Prime Minister Theresa May on Wednesday triggered Article 50, the formal notification of the country's intention to leave the EU.
UK real estate investment, which nosedived last year, is climbing again. Deal volumes for the first three months of 2017 are set to 'comfortably beat' the long-term Q1 average of £9.8 bn (€11 bn) largely due to the sale of trophy assets, according to Savills.
International investors, mainly from Hong Kong, have picked up a number of big-ticket assets in London, helping to keep its key submarkets afloat despite concerns Brexit will scupper the city's massive financial sector.
CC Land strikes again
Hong Kong developer CC Land gave the city the biggest vote of confidence, when on 1 March it acquired the Leadenhall Building (pictured) for £1.1 bn (€1.35 bn). The 46-floor triangular-shaped tower, dubbed the Cheesegrater, is the tallest building in the City of London.
The tower was developed and sold by a 50:50 joint venture of UK REIT British Land and Oxford Properties, the global real estate arm of Canada's OMERS pension fund. 'British Land and Oxford Properties took a bold step at the early stages of the UK’s economic recovery to develop The Leadenhall Building to generate a high-quality, long-term income stream. It’s a decision which has really paid off,' commented British Land's Tim Roberts.
Two weeks earlier CC Land acquired One Kingdom Street in London's Paddington Central for €344 mln. The vendor was TH Real Estate, acting for the Cityhold Office Partnership (CHOP), a joint venture between TH's parent company, TIAA, and two of Sweden's national pension funds. The property provides 24,600 m2 of leasable area over nine floors.
More Hong Kong capital
Emperor International Holdings, a Hong Kong-based property investment company, flexed its muscles in January by acquiring Ampersand, a mixed-use 8-storey building in Oxford Street in central London for €303 mln.
The importance of capital from Hong Kong was stressed at a PropertyEU Investment Briefing at Mipim in March. 'The London market is now dependent on Hong Kong and the Chinese,' said Richard Divall, head of cross-border capital markets for EMEA, at Colliers International. 'It is mainly family office type of capital rather than insurance companies, as the Chinese government is worried they will make the wrong investments like the Japanese did in the late 1980s.'
Not all Asian investment centres on the office sector. Singapore-listed City Developments Limited (CDL) secured a position in London's luxury residential market in February by purchasing the freehold Ransomes Wharf site in the Battersea district of London. The wharf is the location for an apartment project with a gross development value of £222 mln (€258 mln). Including Ransomes Warf, CDL has invested a total of £510.2 mln in 10 prime freehold properties in the UK.
Market in Minutes
The upshot of this sort of activity is that real estate prices are continuing to rise, both in London and across the UK. In its latest Market in Minutes report on the UK, Savills notes that average UK prime yields sharpened to 4.79% in February 2017, with the UK now in the longest sustained period of decreasing yields since early 2014.
Yields in the City office market dropped to 4% in February due to falling supply and continued demand from investors. But downward pressure is also visible in the South East and regional office markets, where yields currently stand at 5.25%, due to increased activity by overseas investors who amplified their exposure to the UK's regions to account for 29% of total regional investment volume in 2016, the highest level since 2012.
Mark Ridley, CEO of Savills UK and Europe, said: 'We are currently seeing steady investment volumes across all markets, but one of the biggest barriers to liquidity is the lack of investment stock currently being considered for sale. With very little speculative development in the office or logistics sector and continued occupational demand, pre-let fundings or refurbishment opportunities will push investment volumes forward.'
Kevin Mofid, director in the commercial research team at Savills, added: 'Overseas investors have been increasingly active in the UK's regional markets, with European buyers, particularly those from Germany, being especially busy. Investors are set to continue to focus on the regions for the foreseeable future as total returns in some regional office markets are predicted to outperform many Central London sub-markets over the next three to four years.'
