Thursday 8 December 2016

Foreign investors lured to London by Sterling slump

Ben Martin, Jack Sidders & Sharon Smyth

Published 21/07/2016 | 02:30

Overseas investors are scrambling to buy assets in London in the wake of the Brexit vote
Overseas investors are scrambling to buy assets in London in the wake of the Brexit vote

the uncertainty following the UK electorate's decision to vote in favour of leaving the European Union is continuing to register its impact on both the commercial and residential property markets in London.

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A central London Travelodge has just been sold to a Chinese property magnate for more than Stg£42m, in a further sign that overseas buyers are scrambling to buy UK assets in the wake of sterling's plunge following the Brexit vote.

Zhang Songqiao's Hong Kong-based Y.T. Realty Group has bought the six-storey building, located in London's Liverpool Street, from two Luxembourg-based firms for Stg£42.3m.

The 45,528 sq. ft site is on a 35-year lease to budget chain Travelodge, which runs it as a 142-room hotel and took up the lease nine years ago. It generated a gross rental yield of about Stg£2m last year and Y.T. Realty said the deal "will further expand the group's overseas property portfolio and enhance its strategic investment in well-developed markets such as the United Kingdom".

It comes after the pound plunged against other major currencies following last month's vote to leave the European Union, a sharp depreciation that makes British assets cheaper and so more attractive to foreign buyers.

On Monday, Japanese telecoms giant SoftBank snapped up FTSE 100 microchip designer Arm Holdings in a Stg£24.3bn deal. Last week, AMC, the US cinema chain controlled by Chinese billionaire Wang Jianlin, also bought the Odeon & UCI business from Guy Hands' private equity firm Terra Firma for Stg£921m.

UBS Group AG, the world's biggest private bank, and Stamford Management Pte, which oversees $250 million for Asia's rich, said some of those they advise are preparing to snare real estate bargains.

UBS's clients have been paying back their pound mortgages following the currency's drop, said Simon Smiles, the bank's chief investment officer for ultra-high net-worth individuals.

Its wealthiest clients are also looking to snap up assets at distressed prices as UK property funds began offering buildings for sale after investors sought withdrawals on concern Brexit would cause property prices to fall.

"Clients I have been speaking to were asking when to buy the pound post its Brexit fall, not selling it," said Smiles, who is based in Zurich, via e-mail.

Sterling fetched $1.3220 at 6:30am in London on Tuesday, after reaching $1.2798 this month, the weakest level since 1985. The currency is set to end the year at $1.27 before recovering to $1.34 in 2017, according to analysts' median estimate.

Brexit hasn't dimmed the allure of owning property in London as it "remains a key financial hub and a desirable destination," said Jason Wang, chief executive officer of Stamford Management in Singapore.

Some of his larger property-investment clients see the current pound's depreciation as a "good opportunity to pick up some prime London properties", Wang said.

Family offices are typically tailored to both investment and personal needs, including estate planning, philanthropy and maintaining homes.

While options traders are more pessimistic on the pound than any of its developed-market peers, they're paying less to bet on its decline than they did last month.

The premium for three-month contracts to sell sterling versus the dollar over those to buy has narrowed to 1.72 percentage points, compared with 6.39 percentage points on June 14, risk-reversal prices compiled by Bloomberg show.

Sterling gained 1.8pc last week, its strongest weekly performance since March, as the appointment of Theresa May as UK prime minister returned a sense of political stability to the UK and the Bank of England unexpectedly kept interest rates unchanged.

"Theresa May should provide some pragmatic leadership in steering the UK through a manageable Brexit," said Stamford Management's Wang, who holds a degree from the London School of Economics and once worked as a hedge-fund manager in the British capital. "Sterling's recent rebound reflects that confidence in her political ability."

Sales of London homes under construction meanwhile had already slumped 34pc in the second quarter as the prospect of a vote to leave the European Union damped demand already hurt by higher taxes. The number of residences sold before completion fell to about 4,600 from 6,974 a year earlier, according to data compiled by researcher Molior London seen by Bloomberg News. A spokesman for Molior declined to comment.

"The approaching referendum added more layers of uncertainty," said Tom Bill, head of London residential research at broker Knight Frank LLP. "That's adding to the two-year slowdown from the December 2014 tax increase, which is still the biggest damping factor."

Demand fell about 23pc from the first quarter after the government cut tax breaks for the wealthiest landlords.

Home values face a "major shock" as landlords offload properties after the measures which, along with new lending rules, reduce returns to near zero, analysts at Deutsche Bank AG said last month.

There was a 3pc increase in the stamp-duty sales tax for landlords and second home owners in April, which followed an increase in charges for all luxury-home purchasers in 2014. That hike means that a 12pc tax rate is paid on portions above Stg£1.5m ($2m).

"The difficulty in all of this is there are a lot of very expensive homes being completed at a time when that market is particularly weak," Johnny Morris, director of research at Countrywide Plc, said by phone.

"Now the uncertainty lies in how currency fluctuations play out in all of this. Some investors may take the view there will be an opportunity on currency shifts," he added.

A record 5,655 homes were completed during the second quarter, the highest since 2009 when the data was first collected. London house-price growth increased by 13.6pc in the 12 months through May, the Office for National Statistics said Tuesday. (Telegraph & Bloomberg)

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