Asian and Middle Eastern Capital Increasingly Important Driver of Central London Property Market

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 the latest research from global property adviser CBRE. In Hungary, Middle Eastern SWF and private investor also appeared on the customer side.

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% of all European property investment from outside the region since 2008, compared to 17% in the previous three-year period (2006 – 2008).

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 £800 million in Central London commercial property; in contrast, over the same period the largest non-UK buyers all invested more than £600m (see table below), with cash-positive foreign pension funds and SWFs being key players in the current cycle.

This current influx of international capital is qualitatively different from previous foreign investment flows into Central London property. Investment from the United States is typically opportunistic in nature; German capital has mainly been from Open-Ended Funds and thus is sensitive to net cash flows (which are unpredictable); the Japanese money that came to London in the late 80s was investment by Life Insurance companies, and thus lacked the long investment horizon of SWFs and cash-positive pension funds. Simon Barrowcliff, Executive Director, Central London Capital Markets, CBRE, commented: “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.”

The majority (56%) of SWFs around the world are financed by revenue from the oil and gas industry. Since the start of 2002, the significant increase in commodity prices has generated greater revenue for countries rich in natural resources and matches the period of growth in SWFs’ assets under management. Growth in demand from emerging economies such as China will continue to keep commodity prices high in the future. Not all SWFs are commodity-based, however; many of the non-commodity-based SWFs are also Asian and have developed in response to the long-term trade surplus. The long established SWFs of Singapore – GIC and Temasek – derive their revenue from the country’s trade surplus, and more recently the assets of China’s SWFs – China Investment Corporation and National Social Security Fund – have been growing rapidly for similar reasons.

“Thepalette of purchasers in the Hungarian property investment market was very colorful in 2011. The single largest portfolio-transaction came from an Austrian customer, while the largest total purchase was from the U.S. company, Heitman.  For the first time on record we registered a sovereign wealth fund as a buyer in the Hungarian property investment market. A private investor from the Middle East also appeared on the purchaser side by buying theBudapest unit of an international portfolio. Although the unusual prominence of the Middle East last year does not yet indicate a trend, the typical Austrian and German domination of the real estate market was definitely broken.”– added Gábor Borbély, Head of Research and Consultancy at CBRE Budapest.