UK property draws Middle East buyers
Middle East investors, benefiting from a weak pound and rising oil prices, increased their spending in UK commercial property even as Brexit prompted buyers from every other region to shrink their spending.
Investors from the region accounted for 24pc of all overseas acquisitions in the fourth quarter compared with 10pc a year earlier, according to data compiled by fund manager Fidelity International.
"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 stabilised instead as sterling's weakness gave buyers from countries including the United Arab Emirates and Qatar a 15pc 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 62pc year-on-year, Middle Eastern investors who depend on petrodollars have been lured back to the UK, 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 Stg£1.7bn 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 83pc year-on-year to Stg£1.6bn 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 UK 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 3pc in Paris and 3.5pc in Berlin compared with 4.25pc 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 UK real estate at KPMG LLP.
The election of Donald Trump has also raised the prospect that London will regain its crown as the top global destination for Middle Eastern investors.
The UK capital was surpassed by New York for spending from the region in the 18 months through June 2016, according to a report by broker CBRE Group Inc.
"There are concerns in relation to America now, in their inward focus and restrictions on who they allow in," Clifton said. "That's a further attraction of London."
Home values in the Hyde Park district fell 14pc in the 12 months through January, the biggest drop in central London's best neighborhoods, as sellers cut their asking prices in the wake of the Brexit vote. Values dropped by an average of 6.7pc across the capital's best districts as successive sales-tax increases damped demand, Knight Frank LLP said in a report on Monday.
The lower prices are luring buyers back into the market, with sales increasing in the final quarter of 2016, the broker said.
The Chelsea neighbourhood saw a price drop of 13.3pc, the second largest among the districts Knight Frank defines as prime central London.
Kensington was next with a drop of 11.9pc.
Knight Frank exchanged contracts on the most London luxury homes in January for three years, as the number of prospective buyers increased 14pc in the final quarter compared to a year earlier, the report said. The gap between asking prices and achieved prices grew to 10pc in 2016, according to data compiled by researcher LonRes.
Luxury London home prices reached a low of at least 22 months in September and are now 6.9pc below the November 2014 peak.