Foreign investors show renewed confidence as London adapts to Brexit
London was an interesting place to be last week, not least given the announcement of the UK's record property investment deal.
That sale involved the landmark skyscraper at 20 Fenchurch Street, known as the 'Walkie Talkie' building, bought by a Hong Kong investor for £1.3bn, representing a net initial yield of 3.4pc and producing an unprecedented return of £635m for the developers Landsec (formerly Land Securities).
But wasn't Brexit supposed to herald a disastrous period for the UK market, with tenants and investors bailing out? It was time to check in with some London contacts and find out what is going on.
Irishman Fergus Keane is a senior director with Cushman & Wakefield and one of the top players in the London investment market. Indeed, his firm acted for the buyer of the 'Walkie Talkie' building, and in May they sold 'The Cheesegrater', the tallest building in the city of London, to another Hong Kong investor for £1.15bn, at a net initial yield of 3.45pc. According to Keane, weaker sterling, as a result of Brexit, is making the UK very favourable for investors from countries where their currency is pegged to the US dollar. "Sterling is 30pc cheaper against the dollar on 20- to 30-year averages," Keane tells me, and this is driving an influx of funds from the Middle East, China, and Hong Kong in particular.
At a recent meeting in Hong Kong with an investor, Keane told me that the first question the client asked was "Where is my aeroplane building?" After some confusion, it transpired that the investor's first criteria was that the building he wanted must be visible from an aeroplane over London. Keane estimates that there are at least 20 investors in Hong Kong seeking 'aeroplane buildings' and with budgets in the order of £1bn each.
Other factors driving overseas investors in London, according to Keane, are better value returns than France and Germany, transparency and liquidity in the market, political tension in the Middle East and a tightening of restrictions on overseas buyers in the US by the Trump administration.
To the layman on the streets, the city is booming, thronged with people and the hotels, restaurants and theatres are packed. Fergus Keane agrees that "despite Brexit and because of Brexit, London retail is flying".
Again, the currency play is the big factor and the city has become cheap for overseas visitors. To emphasise the currency factor to property investors, Keane has surveyed the price of retail goods around the world and points out that items like a top-of-the-range Cartier Tank watch costs £6,000 in London - 20pc cheaper than Hong Kong, New York or Paris.
Keane summarises by telling me that "London became a bit punch-drunk from Brexit, but is finding its feet again. It's not totally reliant on banking, and the tech sector is booming."
Over at Savills, Mat Oakley, head of European Commercial Research, agrees that after the initial shock of the referendum result, companies are starting to take decisions and activate contingency plans. On the development side, there are plenty of cranes on the skyline. In 2017/18 there will be above-average levels of office completions and despite Brexit uncertainty, above-average levels of pre-lettings. "40pc of the city pipeline and 30pc of West End supply is pre-let," he tells me. "And the proportion of tenants signing long leases has increased over the last 12-24 months."
Oakley points out that investment deals, at £9bn for the first six months of the year, are up on last year and reiterates that 80pc of purchasers are from overseas. Development activity is, however, slowing up, says Oakley, with more developers looking for pre-lets. But he emphasises that some developers will see opportunity in uncertainty and he cited the 'Walkie Talkie' deal as an example of a building that was started at the height of the financial crisis, putting it in a strong position when markets changed.
Oakley added that it appears that the negative effects of Brexit will be spread out, reducing the impact. "There may be transition periods of two to three years, but firms can't do nothing for five years. We're seeing a more realistic response now. However, occupational risk has certainly increased, and whilst the numbers look great, the question is, when is the peak time of risk?" he says.
London is a particularly interesting market now. And I can't get past my sneaking suspicion that, somehow, Brexit won't happen.