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Active but not alone

by Richard Fleming

Hong Kong–based real estate buyers were very active in the City of London in H1 2017 but they were not alone. Analysis by Knight Frank of H1 2017 office transactions shows that purchasers from Hong Kong acquired £2.2 billion ($2.9 billion) of offices in the City of London in the first half, compared with the £458 million ($601 million) recorded over the same period last year. Completion of The Leadenhall Building transaction (£1.15 billion/$1.51 billion) in Q1 2017 accounted for a significant proportion of the volume.

Knight Frank agrees that Hong Kong investors have grabbed the headlines but points also to significant City of London office acquisition activity by German investors such as Deka Immobilien AG and Deutsche Asset Management, attracted by the returns available relative to their domestic market and the weakness of sterling. Other global buyers were also active for similar reasons. UK buyers accounted for one-third of deals by number.

“A deep pool of buyers continue to chase City of London offices,” says Nick Braybrook, head of City Capital Markets at Knight Frank. “Looking forward, we expect that Far Eastern investors, in particular Hong Kong buyers, will continue to buy strongly in the second half of 2017. We predict that the total annual spend by Hong Kong–domiciled investors will reach £4 billion [$5.3 billion] — nearly four times the volume transacted by this buyer group last year.

“Importantly, this increase in activity is being facilitated by a rise in the supply of available opportunities to purchase over the last few months. Sellers have been attracted to the market by the continued strong demand from both domestic and overseas buyers, with availability up 20 percent in Q2 2017 compared to the previous quarter and up a third on this time last year. However, with the strong demand that we expect from Hong Kong and other global and domestic investors, the supply numbers could fall rapidly over the next few months as deals are completed,” Braybrook cautions. “This is likely to put further downward pressure on prime yields for City of London offices; currently trading at 4.25 percent.”

“London is not alone in attracting money, with investors targeting assets in major cities across the globe,” adds Anthony Duggan, head of Capital Markets Research at Knight Frank. “Chinese and Hong Kong capital was responsible for 13 percent of all global cross-border real estate investment last year, second only to the United States. While there is some uncertainty surrounding capital flows from China as part of on-going capital controls, we expect Chinese and Hong Kong investors to remain active.

“Despite the capital controls in place, limiting some outbound investment from China, it is clear that deals deemed appropriate, ie. in line with existing areas of business and business plans, will continue from conglomerates, private investors and state-owned enterprises, with CIC’s recent purchase of Logicor being a high-profile example,” Duggan continues. “In addition, many investors will continue to raise funds and invest through their overseas, eg. Hong Kong or Singapore, entities.”

 

Greater China (China and Hong Kong) purchases in 2016 City

 

City Investment volume, 2016 ($) Percentage of Chinese cross-border capital, 2016
New York City $7.0b 24%
London $4.3b 15%
San Francisco $2.3b 8%
Sydney $2.0b 7%
Chicago $1.0b 4%
Phoenix $0.6b 2%
Los Angeles $0.6b 2%
Santa Ana $0.6b 2%
Tokyo $0.6b 2%
Singapore $0.5b 2%

Sources: Real Capital Analytics, Knight Frank Research

This excerpt is from an article in the upcoming September issue of Institutional Real Estate Europe. For more information on this magazine or to sign up for a trial subscription, click here.

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