South Korean investors have returned to the UK’s real estate market, a signal global investors are willing to overlook political uncertainty in Britain on their hunt for yield.
In the first eight months of 2018, South Korean investors bought £2.2 billion of U.K. real estate, up £530 million from a year earlier, according to JLL data.
In August, Korea’s National Pension Service (NPS) announced it had bought London’s Plumtree Court, which will serve as Goldman Sachs’ global HQ, for £1.2 billion. Earlier this year Samsung bought 200 Aldersgate for £340 million.
It’s not just London. In July, one of the largest bank holding companies in South Korea, Hana, bought Gallagher Retail Park, near Birmingham, for £175 million, at a yield of 5.2 percent.
“Many of the big overseas funds look ten or more years ahead and, while South Korean investors moved away from the UK market following the Brexit vote, the feeling now is that the UK and London are mature enough to withstand any impacts in the long run,” says Cameron Ramsey, from JLL’s UK research team.
When the British voted to leave the European Union (EU) in the summer of 2016, concerns swirled over the potential that foreign investors would turn off the taps. While there was a brief hiatus, the concern never fully materialized.
“Overseas investors tend to take a long-term investment view, so the short-term uncertainty around Brexit is not as much of a concern for them as it is for domestic investors,” says Ramsey.
South Koreans were more cautious after Brexit, staying away longer than investors from other jurisdictions. Ramsey says at the time of the EU vote; economic and financial conditions weren’t in line with their investment and risk profiles and their focus was on other markets – but this has changed in 2018.
He believes the renewed attraction of the UK lies in yield.
“The UK has become of interest again because in 2018 yields are showing relative value compared to other European cities and this is a major driver in their decision to return,” he says.
In Manchester and Edinburgh, real estate yields are at around 4.75 percent. In Frankfurt and Dusseldorf yields are just over 3 percent, while in Lyon they are 3.95 percent.
Going forward, Brexit is still creating some headwinds in the UK market. But Ramsey says so far overseas interest is still holding strong.
While key deals have been completed in Central London, there’s increasing evidence that investor are now looking for opportunities in regional cities within the UK, he says.
Korean pension funds have also indicated they plan to increase their exposure to overseas alternatives markets.
Deals in the UK’s regional cities will become more common, says Ramsey. “What we are seeing is a typical pattern, where overseas investors look to Central London first and then move into the regions, and we are seeing this happen faster than usual in the case of the South Koreans,” he says.
Ramsey believes the valuation of the pound, which lowered following the Brexit referendum, and has also seen some fluctuation over the summer, is also a factor because it makes the UK market more attractive.
He says they, and other overseas investors, are attracted to the UK because it is a transparent market, with strong regulation and constrained supply.
Asia has been a particularly constant source of deal-making. The US$1.3 trillion Japanese Government Pension Investment Fund (GPIF) recently announced its plan to invest $65 billion of its portfolio in global real estate and infrastructure. The UK, and London especially, are likely to benefit.
Other major Japanese investors such as Mitsubishi Real Estate, Mitsui Fudosan and NTT are already active.
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