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Research compiled by Jones Lang LaSalle has established that the number one investor in office property in the City of London is the Asian investor. This section spent about £1.77 billion on office buildings this year which equates to more than a quarter of the total invested. Since 2010 London has seen £3.5 billion invested into offices in the City of London from Asian buyers alone. In the last couple of years, foreign investment has exceeded British investment, totalling 28 per cent of the purchases, which has increased from 24 per cent last year.
The main driver for Asian investors to buy in London is the higher yields they receive amongst slower growth in the UK. The yields investors can expect to receive at the moment are around 5.5 per cent and they will hope for future growing rents. England’s current economic situation along with its weak pound has therefore made London a targeted destination for foreign investment.
Most of this investment into the City is coming from private investors and hedge funds from Malaysia, Singapore, South Korea and China in particular. While the biggest investment from Asia is Malaysia’s State Pension Fund and Korea’s Teacher Credit Union and have both in total invested around £1.7 billion.
Why a change in the City market
At the moment property values are 25 per cent lower than 2007 and we are now seeing an increase in the strength of Asian currencies, which has in turn made London properties affordable to Asian buyers. The fluctuation in currency in the UK and in Asian currencies can be seen as a significant catalyst to the rise in Asian investment. For example, the Singapore dollar appreciated by approximately 52 per cent against the British pound within the last five years; this has therefore allowed an investor from Singapore to buy a building in the City for half of what it would have cost in 2007. Another example is the Malaysian currency – the ringgit – which rose by around 41 per cent.
This currency advantage, the fact that overseas investors aren’t taxed on the sale of UK properties if they are non–residents, and the high rents they can receive all equate to a good deal if buying in London.
The high rents achievable on prime properties are down to the fact that there is a lack of supply.
As Sally Brough, at London’s commercial property agents, Morgan Pryce, says, “The current lack of supply in office space has pushed rents into being artificially high”.
However, it has been argued that the high rents of offices in the City will grow at a much slower rate than the rest of London and therefore doesn’t necessarily make the City so lucrative for investors. This perspective is based on the basic supply-and-demand theory: the City contains the most office space on offer compared to the rest of London, and we expect developments due to be completed by next year to provide around an extra 1.1million square feet in office space and therefore we may well see rents in the City descend. This isn’t putting off Asian investors, and as Mitsubishi Estates confirmed, it “believe[s] in the strong fundamentals that underlie the City market”.
We can expect the Asian investor demographic to continue as the leading source of investment in the City for the foreseeable future.
Morgan Pryce is a specialist tenant acquisition agent with offices in Oxford Circus and the City. Morgan Pryce specialises in search, negotiation and project management and works exclusively for tenants.