3 Flags To Watch This Winter In London's £13.4B Office Investment Scene
London’s office investment market has never been more international. According to new data from Savills, buyers from 27 countries are active. Between them they have pushed transaction volumes up to £13.4B in the year to date — 23% above the same point in 2016, and 35% above the 10-year average.
Although U.K. investors have marched back into the market, doubling their spend from £1.2B to £2.4B, these foreign flags are leading the way in London investment.
1. China: Front Doors and Back Doors
This week President Xi Jinping told the Chinese Communist Party congress they would “Make China Great Again”.
To see how that affects London real estate you need to do some math. China-originated investment in the year to date totals £1.2B, according to Savills. But the two big back doors out of China also scored heavily, with Hong Kong investing £4.6B and Macau at £213M. In total that is a shade over £6B, or 45% of all London investment.
The summer’s new rules on China capital outflows could narrow this mighty flood of Chinese money, and London real estate professionals will closely watch Xi's pronouncements on whether these rules will be relaxed.
Regardless, the volume will likely slow. Savills points out that of the £4.6B deployed in London from Hong Kong, £2.4B can be accounted for in just two deals — CC Land acquiring the Leadenhall Building and LKK Health Products Group buying 20 Fenchurch St. With relatively few mega-lots left to buy, the volume of transactions is unlikely to reach these giddy heights again soon.
2. The German Surge
German investors accounted for just over £2B, according to Savills, a massive turnaround from 2016 when they spent just £250M in Central London.
Key deals include Deka Immobilien’s £485M acquisition of Cannon Place, EC4, from Hines.
Why the sudden change — and will German investors remain so active? Savills Germany Chief Executive and head of European investment Marcus Lemli said, “I think Germans have been pushed over the last few years by competitive pricing and are now seeing an opportunity to get back into the London market. Relative to other markets, London looks attractive from the point of view of diversifying a portfolio internationally.”
According to Savills research, office yields in the City of London are 4% compared to 3% in Paris, 3.3% in Frankfurt and 3.25% in Madrid.
In the longer term, German investors might find more reasons to stay at home. According to a Knight Frank survey of 148 leading European real estate investors, based on a three- to five-year hold, 28.5% of investors identified Germany as their preferred investment market in 2018. Spain came a close second. Just 12% of investors, most of whom are London-based, identified the U.K. as their preferred investment market, ahead of France with 9%.
3. The Indonesians Are Coming
Get used to seeing this flag: It belongs to Indonesia. According to Savills, Indonesian investors bought £207.5M of London offices, just 1.55% of the total spend in the year to date. Not worth noticing? Think again.
Indonesia is just coming out of a five-year slowdown and is growing fast — year-on-year gross domestic product growth is just over 5%. The trade balance is widening (and it is positive) and structural reform is underway. So expect Indonesians to be jostling with Thais, Malays and Singaporeans for London commercial property in the next 12 to 18 months.