Westhill Property on China's Investment Boom in London Real Estate Is Poised To Continue

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Growing Chinese interest in investing abroad was a top global business trend in 2013. London, which has of late attracted investors ranging from Greater China billionaires Wang Jianlin and Henry Cheng to mainland government-run giant Greenland Holding Group-, is poised to gain even more funds in the coming years.

That’s according to Stephen Clifton, head of Central London for Knight Frank, one of the world’s largest independent real estate consultancies. Chinese investors purchased £1.2 billion of London real estate last year alone, amid a revival in demand for office space in central London, where take-up increased by 41% to 13.1 million square feet in 2013. Overall investment volume for the central London office market hit a record high of £19.6 billion last year, an increase of 42% from 2012, and 14% greater than the next highest year, which was 2007. Supply fell from 16.5 million square feet in 2012 to 16.1 million square feet at the end of 2013. This reflects a vacancy rate of 7.0%, which is below the 10-year average figure of 8.5%, and the lowest level since 2008.

Clifton expects in the coming years Chinese investors will add more commercial real estate in London. That would make them well-poised to benefit from what Knight Frank predicts will be record high rents in the city by 2018. I exchanged with Clifton last week about the outlook.

Q. Knight Frank is predicting record levels of overseas investment in London commercial property in the coming years. Of late, U.S. companies such as Google and Facebook have been expanding in London. How do you think China will figure in the market in the coming years?

A. Despite yield compression over the last 12 months, London remains good value in global terms. Factoring in currency fluctuations, prime City of London capital values are 40% lower than the 2007 peak for investors buying in renminbi. Additionally, commercial lease lengths in Central London tend to be longer than in many of the major far eastern cities, with prime yields up to 125 basis points higher, making the city particularly attractive. Our China office is currently tracking 40 Chinese institutions and property companies looking to invest up to $100 million overseas. We expect a large proportion of this to target London.

Additionally, a growing number of Chinese companies are acquiring occupational office space in Central London. We are aware of more than 30 Chinese companies or institutions occupying space in London, the largest being Bank of China, which purchased its 110,000 square foot headquarters building next to the Bank of England in 2009, more than doubling its London presence.

Q. Thinking only about real estate, to what extent has mainland developers and investors figured into the growth in investment in London property? Besides the big, well-publicized Wanda project, what other commitments have you seen in the past year?

A. There has already been significant Chinese investment in London real estate; in 2013 alone £1.2 billion of Chinese money flowed into London property. Chinese investors have targeted Grade A, well-located buildings across Central London, and not just large lot sizes. While transactions such as Gingko Tree’s purchase of Ropemaker Place for almost £500 million and Ping An’s purchase of the Lloyds Building for more than £250 million have made the headlines, we have also seen a number of assets traded at £50 million or below.

Q. Looking to 2018, do you expect more mainland real estate money to enter? How so — from real estate developers? financial investors? Why type of projects are mainland investors likely to be interested in the coming years and why?

A. We see property companies and institutions targeting London and they will consider a wide range of asset types and projects. The occupational market has seen an exceptional recovery since the global financial crisis. In 2013 alone, there was 13.6 million square feet of office space acquired by Central London tenants, a 41% increase on the previous year, and we expect levels to continue to rise alongside the ongoing economic recovery. At the same time, the supply of office space is falling. We see opportunities for Chinese investors in both the acquisition of well-located, long-let, quality stock and also in joint ventures.

Q. Hong Kong has long had relatively close ties to London, and its entrepreneurs have been investing in real estate far longer than the mainland’s. What’s ahead for Hong Kong’s investment in London in the next few years?

A. Hong Kong investors have long been comfortable with investing in London; we share similar regulations and legal systems and Sterling offers an important diversification from U.S. dollar investments. Many Hong Kong property investors are no longer first-time investors in Central London, and we see good opportunities for the more confident investor in assets other than the traditional prime.

Q. How much opportunity is growing interest in London real estate among Hong Kong and mainland investors creating for your own businesses at Knight Frank?

A. Knight Frank employs 640 people in Greater China and we are continuing to grow our Shanghai, Beijing and Hong Kong offices. We see Hong Kong and mainland investment in London as an important part of our business going forward.