There's A Lot More To Come From Koreans Piling Into The London Office Market
Korean investors have been a force in Continental European real estate investment for three years now. And in 2018, they are making their presence felt in London.
Korean investors spent about £2.3B on London offices so far this year according to Cushman & Wakefield, almost 10% of the £13B total investment in the capital. That is close to the £1.2B spent by Chinese investors and not far back from the most prolific overseas investors, those from Hong Kong, who spent £1.7B. The London investment market and who is currently buying will be discussed at Bisnow's London State of Office event on 12 September.
And there is more to come. Korea’s National Pension Service today completed a deal to buy Goldman Sachs’ new London HQ for £1.2B (a deal included in that £2.3B total). Overall Cushman predicts that Korean investors could spend up to £4B in the U.K. this year, compared to just £127M in 2016.
Korean firms are not just investors, they are lenders too — fund manager Samsung SRA has raised £170M to provide debt for office buildings in London, Manchester and Birmingham.
The flow of Korean outbound capital was kick-started by a 2015 Capital Markets Act, Cushman said, which made it easier for Korean institutions to invest abroad.
But whereas investors from countries like Malaysia, Hong Kong and China invested in London first and then went to Continental European cities like Paris, Frankfurt and Berlin, for Koreans this process was inverted.
In 2015 yields in Europe were higher than in London, offering better value, and foreign exchange rates made it very cheap to hedge investments into countries which use the euro.
Today, yields for prime assets are often lower in Europe than in London, and the Korean won has weakened against the euro and strengthened against sterling, making the U.K. capital more attractive.
“The Continental European market is less transparent than the U.K., and the U.K. from the beginning of this year has begun to look like good value on a relative basis,” Savills Associate Investment Director Emma Steele said. “Pricing has moved a bit and there has been greater access to some of the stock that has been coming out. Some of the buyers that in recent years from places like Hong Kong that had been very aggressive are now a bit less aggressive, and that is giving Korean buyers more of a chance.
“Good cash-on-cash returns in Europe are getting harder to find.”
Steele said the current wave of Korean buyers were also acting differently to the stereotypical Asian buyer.
“Typically overseas buyers like long-leased assets with as few tenants as possible, something that is easily financeable. But the current buyers have flipped that.”
Examples include multi-let office 200 Aldersgate, which has 26 tenants and was bought by Samsung SRA from Ashby Capital for £311M in January, a yield of 4.5%; and Cannon Bridge House, bought by a consortium fronted by Mirae for £248M in March, a yield of around 5.2%. The asset is split across two buildings and while one 92K SF building is let solely to Deliveroo, the other 195K SF building is multi-let.
One factor to watch with Korean investment into London might be the way the deals are structured. Often asset managers like Mirae will buy and warehouse an asset and then look to syndicate the equity to pension funds and insurance companies, a lucrative fee-earning business. There is a chance that this system could come unstuck if those institutions reach a limit for investment in London or in overseas real estate more generally.
But even if that happens, Steele argued that investors from other parts of the world are ready to pick up the slack. “In a recent trip to Singapore, we met with a few groups who had not looked at outbound investment before who were now interested,” she said.
And the underlying fundamentals of supply and demand continue to look OK for London.
“One of the positive surprises is how London has continued to push along,” Kennedy Wilson Head of Asset Management for Europe excluding Ireland Mike Pegler said. “One of the hardest periods was the months around the Brexit vote, but we saw a positive spike after that as people just got on with doing business, and that has continued. And now as we get closer to the final date we should get more clarity. There is anecdotal evidence about banks beginning to move jobs offshore, but the market has withstood that.”
For everything you need to know about London office investment come to Bisnow’s London State of Office event on 12 September at 7.30am.