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Central London – which includes the West End, the City and East London – was the world’s most actively traded office market last year, ahead of New York and Paris. Photo: EPA-EFE
Opinion
Nicholas Spiro
Nicholas Spiro

Flush with Asian cash, the London office market looks Brexit-proof – for now at least

  • Central London was the hottest office market last year, even with a hard Brexit looming. Despite capital controls in China, Asian buyers accounted for nearly 40 per cent of investments and dominate the £1-billion-plus segment of the market
Nicholas Spiro
Nicholas Spiro
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A “circus”, “Disneyland” and a “failed state”. Prior to the turmoil unleashed by its vote in 2016 to leave the European Union, it was unthinkable that Britain – a country long admired for its political stability and pragmatism – could be referred to in such a disparaging way.
Yet with Britain now knee-deep in a political and constitutional crisis – and just weeks away from crashing out of the EU with no agreement in place on how to continue doing business with the bloc – the country’s reputation, at home and abroad, has been severely tarnished. The British brand, many diplomats and investors believe, is damaged beyond repair.
However, in the London office market, the fallout from Brexit is scarcely detectable. Last year, take-up (the amount of office space let, pre-let or acquired for occupation) reached 12.5 million square feet, slightly up from 2017 and 6 per cent above the five-year average, according to data from Cushman & Wakefield, a property consultancy. For banking and financial services – the segment of the occupational market that has the most to lose from a no-deal Brexit because it would mean the end of “passporting”, which allows banks to service the rest of the EU from their London hubs – take-up rose nearly 20 per cent.

The office investment market has proved even more resilient to Brexit.

Central London – which includes the West End, the City and East London – was the world’s most actively traded office market last year, ahead of New York and Paris. Total investment volumes reached £19.5 billion (US$25.7 billion), only a fraction lower than in 2017 and 22 per cent higher than in 2016, data from C&W shows. The largest source of capital, moreover, was Asia, which accounted for nearly 40 per cent of transactions. British and European buyers, meanwhile, accounted for 24 per cent and 17 per cent respectively.

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Asian capital has been pouring into British commercial property for the past several years as part of a surge in outbound investment. According to a report by Jones Lang LaSalle, another property adviser, published last month, Asian real estate investors were the largest net exporters of capital in the world last year, with nearly US$18 billion more in purchases than disposals, despite the retreat of Chinese buyers due to the imposition of stringent capital controls.

In Central London, Hong Kong investors have picked up some of the slack from mainland Chinese buyers, keeping Greater China as the largest source of capital by nationality last year for the second year running, with 21 per cent of transactions, according to a report published by Knight Frank, another real estate consultancy, last month. In the City submarket, the share of Asian capital was even higher, reaching 52 per cent, with South Korean investors accounting for the largest slice.

In a sign of the enduring appeal of London’s trophy office buildings to Asia’s cash-rich buyers, institutional investors from the region continue to dominate the £1 billion-plus segment of the market. Last year, Hong Kong’s CK Asset Holdings, the conglomerate of retired tycoon Li Ka-shing, snapped up the headquarters of UBS in the City for just over £1 billion, while South Korea’s National Pension Service, the world’s third-largest pension fund, acquired the European headquarters of Goldman Sachs in the City for £1.2 billion. The real estate practice of Linklaters, a British law firm, notes that Asian buyers accounted for half of the 10 £1-billion-plus office deals in London in the past five years.
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The attraction of Britain’s capital is partly attributable to a weaker currency and higher investment yields. The sharp fall in the pound following the Brexit referendum has boosted returns on sterling-based assets for overseas investors, especially those reliant on US dollar funding. More importantly, prime office yields in the City currently stand at 4 per cent, compared with 2 per cent in Hong Kong and 3 per cent in Paris and Frankfurt, making London relatively cheap.

Hong Kong’s CK Asset Holdings bought 5 Broadgate, the London headquarters of UBS, for just over £1 billion from British Land and Singapore’s GIC. Photo: Handout

Yet, Asian property companies are investing in London not just because of the comparative value it offers, but also because of its status as a safe haven. Asian buyers, especially from China and other emerging markets, are drawn to London for the comfort and safety Britain provides in terms of language, law, market transparency and liquidity. Unlike European investors, who are more sensitive to the Brexit drama, Asian buyers are less influenced by the latest developments in Westminster and Brussels and attach more importance to London’s role as a global conduit for trade and investment.

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This is evidenced by the growing share of office development undertaken by Asian investors, with companies from Greater China alone now accounting for 10 per cent of London’s office development pipeline, according to Knight Frank. The adviser notes: “This reflects both the need to access returns higher up the risk curve in a low yield environment and, in some cases, greater familiarity with the market.”

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To be sure, if Britain ends up crashing out of the EU in the coming weeks, causing a severe shock to the British economy and putting property markets under huge strain, overseas investors will inevitably pull back to assess the damage. Yet even then, Asian buyers, who have been the most acquisitive as Britain moves closer to a hard Brexit, may spot opportunities.

It may not be long before the next £1 billion-plus Asian deal in the London office investment market is announced.

Nicholas Spiro is a partner at Lauressa Advisory

This article appeared in the South China Morning Post print edition as: The Brexit-proof appeal
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