Central London realty attracts ME investors

Sovereign wealth funds (SWFs) and cash-positive pension funds from Asia and the Middle East are an emerging force behind the high level of global capital currently flowing into the Central London commercial real estate market, according to a new report.

Central London has always played a pivotal role in international commercial property investment both in a European and global context, completely overshadowing other global cities in terms of cross-regional investment into European real estate, because of its traditional strengths of transparency, long income flows and relative liquidity.

Post-credit crunch this trend has become even stronger, with Central London attracting around 41 per cent of all European property investment from outside the region since 2008, compared to 17 per cent in the previous three-year period (2006 – 2008), CB Richard Ellis (CBRE), a global property advise,r said.

Since the “credit crunch” there has been a notable increase in Central London property investment market share by investors with long-term hold strategies such as cash-positive pension funds and SWFs. Many of these players are new entrants to the European market and the presence of a number of Middle Eastern and Far Eastern investors is notable.

To put this investor diversification growth in context, over the past three years only one buyer from the United Kingdom (UK) - Legal and General - has invested more than £500 million in Central London commercial property; in contrast, over the same period the largest non-UK buyers all invested more than £600m, with cash-positive foreign pension funds and SWFs being key players in the current cycle.

There are a number of factors driving SWF and cash-positive pension fund investment activity at present, namely insufficient domestic investment opportunities forcing capital overseas; diversification from domestic economies; and domestic regulatory change giving the potential for sizeable amounts of capital to flow into the real estate market from the pension fund industry.

Simon Barrowcliff, Executive Director, Central London Capital Markets, CBRE, said: “The fundamental drivers of growth in cash-positive pension funds and sovereign wealth funds are expected to continue and capital from these sources will continue to enter and power the Central London property investment market. Legislative change within Asian pension funds to allow investment in foreign real estate is also likely to gain momentum, and expectations for the commodity market remain strong.

Asian investors, in particular, like the security provided by the UK legal system and its conglomerates and private funds look to London for strategic reasons and risk aversion.”

He added: “The continued inflow of capital from SWFs and pension funds is likely to have a knock-on effect for the UK commercial property market. The long-term investment horizon for these types of investors means that increased competition in a supply constrained market  could depress yields further at the very prime end of the market.

“Although some of the funds who have been active in real estate for longer might need to diversify away from London, the number of SWFs and cash-positive pension funds not yet in London – or even in real estate – suggests that this sector of the market will remain key to the London investment market for some time to come.”
 

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