Investments into the likes of iconic London buildings such as the Cheesegrater and Walkie Talkie have made Hong Kong the top buyer for London commercial real estate. But large overseas investment into London’s commercial buildings has brought more affordable cities such as Manchester and Birmingham into focus.
Hong Kong investors pumped record amounts into London office deals in 2017, adding to the large volumes of international capital which are forcing property transactions out of the capital into the wider UK.
Transactions from Hong Kong accounted for over a third of total investment in London in 2017, and just under a half of all overseas investments, led by two large deals in first and third quarters, according to data from international property consultants CBRE.
In the first quarter, 42 per cent of total investment came from Hong Kong, while in the third quarter the city contributed nearly 60 per cent of the total inflow.
London has been a focal point for global investors since recovering from the financial crisis, said Chris Brett, head of international capital markets at CBRE UK. Led firstly by Canadian and German investors, Hong Kong joined the mix and has steadily increased its cash flow into the UK’s capital over the last three to five years.
Investment from the city boomed after the sterling weakened following the Brexit vote in June 2016.
“The foremost reason is the weak pound in comparison to pre-Brexit days,” said David Ji, head of research and consultancy for Greater China at Knight Frank. “If the issues surrounding Brexit are solved, I imagine the pound would go back up to previous levels, and then even on the currency alone the investment will have generated some profit.”
Last year overseas investment accounted for over 80 per cent of commercial property transactions in London, tipped by two major deals from Hong Kong.
In March, London’s Leadenhall Building, better known as “The Cheesegrater”, was bought by Hong Kong-listed developer CC Land Holdings for £1.13 billion (US$1.5 billion), while in July the 20 Fenchurch Street property, known as the “Walkie-Talkie”, was sold to sauce maker Lee Kum Kee International Holdings for £1.3 billion in a record transaction for a single building in the UK.
“The 2017 peak was largely driven by those two transactions coming to the market,” said Brett. “It is rare to have buildings of that size come to the market both in a very short space of time,” adding that families behind large corporations wanting to diversify their portfolios have led the inflow of capital and also because of their the familiarity with UK laws, education and language.
Ji agreed, adding that “the UK has a huge advantage in that it runs a similar system to Hong Kong: the laws and regulations are similarly understandable. The high availability of quality assets is also an attractive feature of London.”
Capital from the mainland was limited because of government regulations on the outflow of capital.
But some mainland entities, like CC Land, use their Hong Kong subsidiaries to launch overseas investments to get around controls, Ji said, adding to the city’s figures.
Other major international investors in London last year included private wealth from the Middle East and money from German institutions, such as Union Investment who acquired a nine-storey office building in east London from Greyhound Investing Corporation, for about €245 million (US$300.5 million) in November.
Meanwhile, large international investment into the UK’s capital is pushing both local and foreign buyers to more affordable, up-and-coming cities like Manchester and Birmingham.
“In the last 12 to 24 months we have seen a lot more UK investors investing in wider UK areas, because they can’t compete with the international capital coming in,” Brett said.
The BBC’s decision to move a large part of their operations to Manchester is one example of how many UK businesses are relocating up north, said Mallam Grant, head of sales for Hong Kong at Property Alliance Group.
International investors are also attracted by Manchester and Birmingham’s lower prices, global connectivity, retail, job opportunities and strong student bases.
About 80 per cent of FTSE 100 companies have a presence in Manchester, with numbers rising each year, he added.
Property Alliance Group, Manchester’s largest developer, set up an office in Hong Kong in August, after finding 60 per cent of their overseas buyers came from the city. With the new high-speed railway connecting the northern city and London set to be in operation by 2033, the already high levels of investment into Manchester will grow, Grant predicted. “I suspect you will start to see a shift five years before then while business space prices are lower.”
But some international investment is turning away from the UK completely and towards Europe, which is perceived to be more politically stable post-Brexit. As Paris, Berlin and Frankfurt have taken some of London’s market shares in financial and hi-tech industries, they pose the biggest threat to foreign investment.
“As I travel around [Asia] I get a lot more questions than I did three to four years ago about Paris and Germany,” Brett said.
France’s political stability since Emmanuel Macron became president in 2017, and Germany’s consistent stability “has given occupiers more confidence, which is the bedrock of any real estate market,” he said.