by Jack Sidders
Brexit put the brakes on U.K. commercial property investment for most overseas buyers. For those from the Middle East, the subsequent slump in the pound and a rebound in commodities outweighs the risk to values.
Investors from the region accounted for 24 percent of all overseas acquisitions in the fourth quarter compared with 10 percent a year earlier, according to data compiled by fund manager Fidelity International. Buyers from every other region shrunk their spending, the data shows.
“We have seen a really significant increase from our Middle Eastern clients in their appetite for London,” Stephen Clifton, head of central London at broker Knight Frank LLP, said in an interview. “There are two key reasons for that: currency and stability.”
Office values in the City of London financial district fell the most in seven years after the vote to leave the European Union and property funds were forced to freeze redemptions as investors, fearing further price drops, rushed to withdraw money. Values stabilized instead as sterling’s weakness gave buyers from countries including the United Arab Emirates and Qatar a 15 percent currency discount after the referendum.
“The pound has taken an absolute battering,” Matthew Richardson, head of real estate research at Fidelity International, said in an interview. With the price of oil rising 62 percent year-on-year, Middle Eastern investors who depend on petrodollars have been lured back to the U.K., he said.
Buyers from the region had bought or developed some of the city’s best known landmarks before the price of oil fell to its lowest level in a decade last year. Qatar’s holdings include stakes in the Canary Wharf financial district, the Shard skyscraper as well as Harrods department store. Kuwait’s St Martins unit bought More London, a group of properties next to Tower Bridge, for about 1.7 billion pounds in 2013 and Abu Dhabi Investment Corp. is developing apartments on Grosvenor Square in Mayfair.
As crude fell in price and property values reached record highs in London in 2015, investment from the region slowed for six successive quarters, the Fidelity data shows. Now they’re back with investment rising 83 percent year-on-year to 1.6 billion pounds in the fourth quarter, the asset manager said.
Deals in the period included the acquisition of The Peak office building in the Victoria district, 5 King William Street in the City of London and a property opposite the Ritz hotel in the Mayfair district, Fidelity said.
While the collapse of the pound has also benefited Asia Pacific buyers, a crackdown by the Chinese government on outbound capital flows has helped Middle Eastern buyers regain market share, according to Richardson. Many investors from the region also have long standing relationships with the U.K. and its education and legal systems which provides a sense of stability, he said.
As well as currency discounts, London real estate is luring buyers after becoming more affordable compared to other major European markets. Prime office yields are 3 percent in Paris and 3.5 percent in Berlin compared with 4.25 percent in the City of London financial district, according to Knight Frank.
“These are investors who know London well and it means you can pick up these assets a lot cheaper than historically,” said Andy Pyle, head of U.K. real estate at KPMG LLP.