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October 31, 2016

The United Kingdom’s property investment climate has started to stabilise in the wake of Brexit. However, while some investors acted with caution, others – in particular those from mainland China and Hong Kong – saw opportunity, and have been sweeping up real estate assets in Central London, bolstering the city’s property market.

“The initial reaction immediately post-Brexit referendum was a ‘wait and see’ approach,” says Alistair Meadows, JLL’s incoming new head of UK Capital Markets.

“Political uncertainty, and its potential to impact the UK economy, meant most international investors sat on the sidelines.”

“However in the past month we have seen greater overall investor confidence and improved sentiment towards investing in the UK. It is fair to say the UK economy is proving its resilience, and greater clarity on the Brexit process and timing has helped to support this renewed investor confidence.”

There can be no doubt that Brexit impacted the investment cycle with analysts expecting transaction volumes for Central London commercial real estate to be close to £12-13 billion for 2016, down from £19 billion pounds recorded in 2015.

However, while total investment volumes may have fallen, Brexit appears not to have reduced the enthusiasm of Asian investors for Central London real estate, and particularly those from mainland China and Hong Kong.

“Asian capital, buoyed by sterling depreciation against foreign currencies and driven by appetite for income, has been the most active in London in the past year,” says Julian Sandbach, Head of Central London Capital Markets at JLL.

Their demand for real estate assets continues a trend evident in the market for the past five years. Over 2006-15 transaction volumes from mainland Chinese and Hong Kong investors have increased 20-fold, and they now account for 29 percent of total transaction volumes (by price) compared to under one percent in 2006.

Those looking for investment opportunities from mainland Chinese and Hong Kong investors rose sharply after 2011, more than doubling from £0.76 billion in 2011 to £1.96 billion in 2012. They have not fallen below £1.5 billion annually since, and have already exceeded £2.0 billion this year to date.

Sandbach explains the factors behind the Chinese and Hong Kong interest in London. “Post-Brexit, the market is attracting investors looking to take advantage of the Sterling’s fall against RMB and HK Dollar,” he says. “There is also growth in Chinese and Hong Kong High Net Worth Individuals (HNWIs) and sovereign wealth funds seeking to diversify across geographical boundaries.”

“In addition, UK regulations governing foreign asset ownership have relaxed, and the capital flows into pension funds has increased as the Asian population ages, and many of these funds are looking to real estate as an investment class.”

“Consequently, Chinese and Hong Kong capital is some of the most active in Central London, predominantly for core, long income offices.”

Recent large deals have also helped to stabilise and revive confidence in the market. They include the sale of the Ryder Court office building in West End, the Doubletree Hotel in Docklands, and Hong Kong investor, Kingboard’s return to the London property market with a £271m acquisition of the European headquarters of WeWork in the City of London.

But the field has not been left to Chinese and Hong Kong interests alone, with Singaporean capital also been active in the UK recently – GIC and UOL/UIC negotiated deals worth more than £500 million for UK real estate assets in the span of just two weeks.

“These deals, coupled with Apple’s announcement of its new UK HQ at Battersea Power Station, has created a much more stable and positive environment,” Meadows says. “We see this continuing for the rest of 2016 and into 2017, although the implications of Brexit on the UK economy and, in turn, occupiers are still to be determined.”

Meadows believes London has an ongoing appeal, offering capital preservation, yield, liquidity and transparency.

Alistair Meadows
JLL Capital Markets

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