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Non-EU Investors Love The City Of London, But Should Remember Currency Volatility Can Go Both Ways

London office rents have shattered previous record, CBRE data shows.

Investment into City of London property from non-EU overseas investors rose 75% in 2018, according to Datscha, as European investors turned tail ahead of Brexit.

But new research shows that a big driving factor for investment in London, the falling value of the pound, can be both a positive and a negative factor for foreign investors.

New data from PropTech platform Datscha showed that non-EU investors spent £6.2B on City of London assets in 2018, up from £4.1B the year before.

In contrast, investment from EU-domiciled investors fell by 68% to £885M. Overall City investment rose by 46%, or £3B, from £7B to £10.3B, in spite of volumes tailing off toward the end of the year. Domestic investment rose from £818M to £1.2B.

“The dynamic for 2018 has clearly been driven by the adjustment in 2017, influenced by the UK’s political uncertainty and weakening of Sterling, yet this has still brought positive interest in the City of London from a number of overseas buyers wanting a stake in what we believe is an ever-appealing investment zone,” Datscha Head of Research Lesley Males said.
“Although 2019 has begun with low investment volumes to date, 2018 is the true barometer of the value of the City, and our data shows healthy interest from all corners of the world.”

South Korean investors spent more than investors from any other country, totalling £2.4B, Datscha said. Chinese and Hong Kong investors were also among the top spenders, purchasing more than £2.3B, but this was down 43% year on year, most likely due to the restrictions placed on Chinese investors by their government. North American investment doubled to more than £1.3B, driven by the U.S. share of the £580M purchase of Devonshire Square.

As Males pointed out, the fall in the value of the pound after the Brexit vote is often cited as an appealing factor for overseas property investors looking at London. But using currency movements as a basis for investment in property is not straightforward, according to new research from MSCI.

It looked at property returns during the two periods of major currency volatility in the UK in the last 30 years — the period after the 2016 Brexit vote, and the period following Black Wednesday in 1992, when the UK crashed out of the European Exchange Rate Mechanism.

MSCI looked at the returns for investors that had their holdings denominated in Sterling, compared to those whose holdings were in other currencies like euros or dollars.

After both major market-moving events, the Sterling-denominated index’s total returns recovered quickly following the initial shock, MSCI said. But the same index denominated in one of the four non-UK currencies failed to bounce back, as the pound continued to depreciate significantly against the other currencies.

For example, from shortly before the Brexit referendum in May 2016 until December 2018, the Sterling-denominated MSCI UK Monthly Property Index would have returned a cumulative 20%. By contrast, the euro-denominated index, over the same period, would have returned only 2.26%. The dollar has performed similarly to the euro.

So just because currency movements make property in a country look cheap, that doesn’t mean the value of a currency won’t continue to drop, and mean your investment is worth less than when you bought it.