London’s office sector at a discount thanks to Brexit woes, weakening sterling

Lam Ka-sing

Hong Kong investors looking to leverage opportunities in London during a period of currency weakness might want to take a closer look at the office market, where solid occupier rates indicate solid returns even as political uncertainty lingers, according to experts.

International investors appear to be in a wait-and-see mode, having taken to the sidelines, as they gauge the political outlook three years after the Brexit referendum, according to consultancy Knight Frank.

“Future transaction levels of London’s property will be higher as buyers sense good value,” said Paddy Dring, global head of prime sales at Knight Frank. “The continuing weakness of the pound means there has been a good balance of international and domestic demand, with many [already] pricing in the political risk surrounding Brexit and taking a long-term view.”

The pound has dropped 6.2 per cent against the US dollar since June 23, 2016, when the Brexit vote took place.

Investments by Hong Kong and Chinese buyers into London’s office property market fell by 64.3 per cent in 2018 from a year earlier, according to data from Real Capital Analytics, which tracked transactions worth more than £10 million.

“Combined acquisition volumes from China and Hong Kong fell in comparison with last year, following the government crackdown on overseas purchases of non-strategic real estate,” said Petra Blazkova, senior director at Real Capital Analytics.

Skyscrapers and office buildings are pictured in the City of London as pedestrians use Waterloo Bridge to cross over the River Thames on August 1, 2018. Photo: AFP

“Moreover, the outbound investment activity has been affected both domestically, by monetary tightening, and externally, by US-China trade frictions.”

London’s property market continues to struggle, with home prices in April slipping 1.2 per cent on year, according to official data.

“Investors are nervous about Brexit uncertainty and its impact on economic performance and this is why investment has slowed,” said Walter Boettcher, director of research and forecasting at Colliers.

But Boettcher said London office prices will remain stable given ongoing strength of the occupier market.

London’s retail property is expected to deflate by around 5 per cent over the next six months as prime rents fall by 2 per cent.

Hong Kong investors turn to outer London areas in search of growth potential

Boettcher said the pound is already low and attracting interest, but if the Brexit outcome is negative, then sterling will fall by another 5 to 10 per cent. Such a sharp drop in the currency is expected to draw opportunistic investors, such as US private equity firms.

Fergus Keane, international partner of London capital markets at Cushman & Wakefield, said the negative impact of Brexit on prices may already be factored in.

“People are now bored with Brexit – life goes on – London has been London for 1,000 years and has seen off the Romans, the plague and much more. Brexit certainly will not finish it,” said Keane. “The occupier dynamic is exceptionally strong and driven by tech – tenant demand is good so underlying fundamentals are strong.”

‘Brexiety’ becomes a word as foreign investment in UK real estate drops to its lowest level since 2016 vote to leave European Union

Keane recently completed a marketing tour to Hong Kong and Singapore in an effort to promote London-based developer Almacantar’s central London complex One and Two Southbank Place.

The project is located near the London Eye, a landmark feature in the British capital.

The London office complex, which overlooks the Thames, is being offered at £875 million (US$1.11 billion), or £1,525 per square foot. The complex has a floor area of 573,707 sq ft.

The property is also located nearby Waterloo Station, Britain’s busiest rail station. Core tenants in the building include the London headquarters for Dutch oil giant Shell and collaborative workspace host WeWork.

The asking price is 60 per cent higher than the £550 million Almacantar paid for the complex in 2015. At the time, the deal ranked as the most expensive ever completed on London’s South Bank.

The new pricing is at least 8.9 per cent more expensive than other prime property in Waterloo, according to data from Colliers.

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