In 2010, recovery in the Central London market was in full effect and transactional volumes were up by 34% on 2009, producing an annual turnover of in excess of £10 billion, and ensuring London was the world’s largest investment market by turnover despite having less investable stock than several other global markets.
Investment in offices in London’s West End reached £5.02 billion, a 77% increase on 2009 levels. Volumes were dominated by foreign investment accounting for 62% (£3.3 billion) of the total, with UK vendors providing the real estate, which made up 59% of sales. A similar pattern emerged in the City of London market producing annual statistics showing that, in total, 63% of Central London assets were acquired by overseas investors.
This is a story that has been well documented since the London downturn of 2008 and early 2009. It was at this point in the market cycle that the expressions ‘safe haven’, ‘transparency’, ‘currency’, ‘value’ and ‘Sharia’ all became everyday vocabulary to those in the Central London market. Across the City, Canary Wharf and the West End, a new (to the UK) breed of investor emerged; those with equity, predominantly from the Middle East but also Eastern Europe initially, who were prepared to gamble on the longer term fundamentals of a Global Real Estate world in crisis and a capital city offering ‘once in a generation opportunities’ due to London’s transparent correction as well as significant savings on exchange rates. The trend grew and by the end of 2010, the market was familiar with the overseas buyer. As many as 45 different nationalities were regularly inspecting opportunities in London’s commercial real estate.
Risk-free, long-dated income, prime location, trophy asset – these were all familiar requirements that led to high demand, yield compression and turnover. We estimate that the equity targeting the UK market, of which over 80% is for Central London, is in excess of £52 billion. From Asia to the US, Sovereign Wealth Fund to High Net Worth individuals, property company to pension fund, the path through Heathrow is getting busier.
Against a backdrop now of rising rents, selective bank lending, low interest rates, overseas political unrest and continued sterling weakness, demand is increasing. 2011 will see Asian capital as the dominant overseas force in Central London. With a desire to explore development, short income, riskier cashflows as well as long income vanilla transactions, this Asian demand will be widespread.
We generally expect overseas investors to move further up the risk curve, looking for short income and development opportunities as occupational markets improve and the development funding gap provides opportunity. As 2011 progresses, demand will grow and London will witness capital sources from mainland China, Indonesia, Thailand and Taiwan, in addition to the Hong Kong, Singapore, Malaysian and Korean investors already prevalent.
London will continue to be the dominant destination for overseas capital, especially as the underlying market fundamentals strengthen and Government cut-backs feed into regional cities leaving London relatively sheltered. We expect prime real estate to capture the majority of overseas capital, Middle East investors to expand their portfolios and new entrants to emerge from countries displaying political instability and those benefitting from this instability by increased oil prices.
London as a financial centre continues to play a major role in the global economy and as a magnet for offshore investors will lead the global capital markets once again in 2011. The major difference from 2010 will see Asia Pacific investors overtake the Middle East as largest investor base as they diversity from their local markets.
Currency will remain a factor as will the ability to purchase quality real estate at pricing, which on a global scale, represents value to overseas capital. Although interest rates will increase from their historic low strengthening Sterling, currency savings will remain compelling.