The Leadenhall Building, left, otherwise known as the Cheesegrater for its shape, was sold earlier this year to CC Land Holdings, backed by a Hong Kong property owner.
TOLGA AKMEN/AGENCE FRANCE-PRESSE/GETTY IMAGES
Private investors from China, Hong Kong often price out institutions, and cash-only bids keep U.K. lenders on the sidelines
by OLGA COTAGA via Mansion Global
The ever-growing appetite among rich Asians for trophy assets in London is leaving some institutional investors on the sidelines.
Pressured by low yields and political issues at home, cash-rich private investors from China and Hong Kong are snapping up trophy buildings in the U.K. capital. Often prepared to spend whatever it takes, these wealthy investors are pricing institutional investors out of the market. And because they don’t need to borrow to buy, U.K. lenders are feeling the pinch.
Of the £12.2 billion ($16.1 billion) spent on central London offices in the first three quarters this year, almost half came from private Chinese and Hong Kong buyers, according to real-estate consultant Knight Frank. That is a big jump from last year, when the group accounted for just less than a quarter of overall spending, and from 2015, when the figure was 7%.
“We have certainly seen this year a rise from Asian private investors compared with institutional investors,” said Jessica Hardman, head of U.K. real estate at Deutsche Asset Management.
J.P. Morgan Asset Management is one of the institutional investors staying on the sidelines. It hasn’t bought much real estate in London for the past couple of years.
“London is a two-tier market right now—the Asian investors and everybody else,” said Joe Valente, head of research and strategy of European real estate at J.P. Morgan Asset Management, adding that the firm is waiting for the prices to fall before entering the market again.
With Beijing trying to control how much money goes out of the country, Chinese institutional investors have been replaced by private investors, often using Hong Kong stock exchange-listed vehicles to take advantage of the looser capital controls in Hong Kong. And since private investors don’t usually go through traditional asset managers, who manage institutional money, asset managers have taken a hit, according to Nick Braybrook, head of City of London investment at real-estate consultant Knight Frank.
“We are seeing that a number of buyers coming from China and Hong Kong are taking on the responsibility of buying and asset-managing themselves,” said Chris Gilchrist-Fisher, senior director at CBRE Global Investors. The majority of these buyers recently have been family offices rather than institutions, Mr. Gilchrist-Fisher said.
One such family office is Hong Kong-based Lee Kum Kee Group. Through investment vehicle LKK Health Products Group, the family office in July said it was buying one of London’s most recognizable buildings, known as the Walkie Talkie because of its shape, for £1.28 billion. It was LKK’s first real-estate purchase in Europe.
Another London landmark, the Leadenhall Building, otherwise known as the Cheesegrater for its shape, was sold for £1.15 billion to CC Land Holdings Ltd., backed by a Hong Kong property owner. The difference between the winning bid and the next highest was £100 million, according to J.P. Morgan’s Mr. Valente. That next highest bid was from an institutional investor, he said.
Asians are buying real estate all over Europe and their investment is expected to more than double in 2017 from last year, according to real estate adviser Savills. The U.K. remains their main market in part because U.K. commercial real-estate yields are almost twice those in Asia.
Another reason is relative political certainty.
The U.K. remains an attractive market in part because U.K. commercial real-estate yields are almost twice those in Asia. PHOTO: DOMINIC LIPINSKI/ZUMA PRESS
Even with Britain’s departure from the European Union approaching, “the political haven that the U.K. offers means they will pay a little more for these assets than domestic investors would do,” said Hayley Scott, from the structured property finance team at financial-services firm Investec.
Still, these investors are generally looking at key London locations and are willing to buy mostly the best central London buildings.
“For the most core product in London, the Hong Kong and Chinese investors are the most aggressive buying group,” said Rasheed Hassan, head of cross-border investment at Savills.