The key to optimising an investment portfolio is risk diversification. The idea is not something new but investors have recently become more aware of its importance due to the Covid-19 pandemic. Property investors are now reviewing their portfolios to ensure diversified sources of income by sector and by geography. London’s commercial assets present a good opportunity for Hong Kong investors and developers to diversify their investment income with attractive returns and lots of potential upside to boot. Their love for London’s commercial assets has not waned as a result of Covid-19. The recent purchase of 25 Cabot Square - home to Morgan Stanley’s business - by Link Reit for £380 million are just an example underscoring the trend. Hong Kong funds remain a strong engine fuelling investment activities in the UK capital. Hong Kong clients like to invest in assets located in core areas of London, which are either close to its prime streets or tube stations in the so-called Zone 1 area. This is especially true for first-time buyers, as they prefer core assets. UK’s offer of a citizenship path for Hongkongers reignites demand for London homes The West-End and City markets are usually favoured by Hong Kong investors, as there is a very limited new supply to cater for a diverse investment appetite. For funds looking for larger assets, the Canary Wharf market is also worth considering. For many Hong Kong clients, the asset itself should preferably be held under a freehold title and committed with a long lease and a strong tenant covenant. Currency is also one of the pull factors for Hong Kong investors in the London market, given the strength of the local dollar. It took less than HK$10 to buy £1 for most of 2019. A few years ago, it needed HK$12, and as much as HK$16. The sterling’s weakness presents an opportunity for Hong Kong funds to snap up London properties at a ‘discount’. Another plus is the Brexit uncertainty that has now been eliminated in January after an agreement relating to the UK departure from the European Union. Brexit will enable businesses in the UK to trade more freely with global markets, especially those in emerging markets where major future growth opportunities lie. Clarity on Brexit outcome provides greater stability in the London commercial property market. This is a boost to Hong Kong investors’ confidence in their investment decision. Admittedly, the core London commercial property market has not been spared during the Covid-19 pandemic. Transaction volumes of commercial properties in London were substantially lower in the first half of 2020 compared with the same period last year. Deals involving large investment sums were the initial casualties of the pandemic, and a lot of the other potential transactions have either been delayed or put on hold because of due-diligence hurdles. There are currently also limited stocks being actively marketed, as core assets that are being tightly held by landlords. UK’s stamp duty holiday likely to entice more Hong Kong homebuyers fleeing security law Yet, there remains a willingness from various local and overseas parties to pursue the limited opportunities. As such, there have not been any cuts to prices for core assets in London, attesting to the market resilience. Instead, analysis from the recent en-bloc commercial property transactions in the core London area shows that investment yields are holding up firmly at around 4-4.25 per cent, similar to the levels before the Covid-19 outbreak. Arranging acquisition financing for Hong Kong investors is not difficult. The loan-to-value ratio from banks in the UK generally ranges from 50 to 60 per cent. There is also an active debt market in London, which enables investors to easily tap into various sources of funds for London to fund commercial property acquisitions. All these suggest Hong Kong investors is likely to be more active in the London commercial real estate market in the coming months, with home-grown capital being one of the key driving forces in the market. Hong Kong investors and family offices that have yet to gain any exposure to the London real estate market are likely to consider diversifying their portfolio there. For those that have already a foot in the London market, it is worth considering assets with a core-plus strategy or assets located in emerging areas of Greater London with different risk and return exposure. Despite a softer market in the first half this year, it is expected that the London commercial property investment market will be active again in the near future with an influx of Hong Kong capital, depending on ability and confidence to travel. Alvin Leung is a director of capital markets at JLL in Hong Kong