Brexit hasn’t deterred foreign investment in UK property

Asian investors like London but the outlook for UK commercial property may not be rosy.

Newcastle United owner Mike Ashley has decided to put the club up for sale after running it for 10 years.

The Sports Direct boss is stepping aside so a new owner can take Newcastle to the next level. ‘The next level’ in the Premier League often means getting a foreign owner.

Over the years many English clubs have come to be owned by overseas investors. The majority of England’s top flight clubs are now foreign-owned.

It doesn’t always lead to a happy marriage, but clubs like Chelsea and Manchester City have certainly reaped the benefits.

Both are now title contenders, something they hadn’t been for a long time before the change in ownership.

It’s not just football that attracts foreign investors to the UK. Foreign investors are buying up a whole lot of office space in London.

“Asian investors pour record sums into London offices,” reads a Financial Times headline.

As much as 90% of investments in London commercial property in the last quarter came from overseas, it says.

That sounds promising. It would seem Brexit has boosted rather than deterred foreign investment in the capital.

But before Prime Minister Theresa May and Chancellor Philip Hammond uncork the champagne, they might want to take a closer look at the figures.

“Investor sentiment towards UK commercial property has been indifferent,” says David Stevenson, Investment Director at Strategic Intelligence.

Asian investors like the look of London

Hong Kong company Lee Kum Kee set a record when it bought the “Walkie Talkie” building for £1.28bn in July.

The price the Asian food conglomerate paid was exceptional, but other than that the transaction forms part of a trend.

Foreign investors love the UK commercial property market. So much so that they pour in more money in London’s brick and mortar than UK investors.

Two thirds of a total £4.8bn invested in London office space came from Asian investors last quarter.

In total foreign investors accounted for 90% of these transactions, figures from CBRE Group show.

Why is that?

Well, one obvious reason would be the pound’s drop in value.

“The post-Brexit decline in the pound has made sterling-priced assets more attractive for international buyers, says David Stevenson.

“I’m not surprised that these have been snapping up British buildings more cheaply.”

Since the EU referendum, the value of British currency has fallen significantly and this makes investments in the UK cheaper to overseas investors.

Foreign investors now get more for less, so to speak.

Another reason is that a lot of foreign investors simply see an opportunity to park their money in a safe place.

“Chinese investors fear greater capital controls being forced on them,” writes Aime Williams in the Financial Times.

“In August, the government implemented regulations targeting ‘irrational’ investments in overseas sectors including property.

“Although Hong-Kong companies are not subject to these curbs, many fear the impact of potential Chinese market instability and so are moving cash.”

This would explain why Asian investors have become more prominent when it comes to investing in British commercial property.

Either way, Theresa May and Philip Hammond will be glad to see that foreign investment keeps flowing into the country.

It will confirm to them that Britain stays an attractive destination for foreign capital.

With the Brexit negotiations in a deadlock, it’s a welcome piece of good news.

Outlook for British commercial property

I call it “good news” because the FT speaks of “record sums”.

London’s Walkie Talkie building changed hands for the biggest fee ever paid for a single building in the UK.

You’d think that means the UK property market is heading in the right direction, but not everyone is impressed.

“The net amounts of money invested in UK commercial property by overseas investors have been no higher in 2017 than they’ve been over the last five years,” David Stevenson points out.

“The total number of deals in the sector has been falling steadily since 2014. In other words, overall investor sentiment towards UK commercial property remains indifferent.”

Way to pour cold water on that news, David!

Well, I suppose if you’re a glass half full kind of person, you could at least say that Brexit hasn’t deterred foreign investors.

What if we look to other trends, are they more promising about the future of UK commercial property?

“The latest Markit construction PMI [purchasing managers’ index] print suggests that aggregate commercial rents will drop next year,” says David.

“That would imply falling capital values unless yields also decline: a lower yield means a higher price.

“But with UK interest rates more likely to rise than fall, commercial yields could also go up, hitting values even more.

“Apart from infrastructure spending, I reckon the outlook is poor for all British bricks and mortar next year.”

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